SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 2
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 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 No. 1-7775
MASSEY ENERGY COMPANY
(Exact 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)
Registrant's telephone number, including area code: (804) 788-1800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common stock, $0.625 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was $1,550,160,567.70 on December 31, 2001 based upon the volume
weighted average sales price of the registrant's Common Stock.
Common Stock, $0.625 par value, outstanding as of December 31, 2001 -
74,773,920 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
registrant's definitive proxy statement for the 2002 annual meeting of
shareholders, which proxy statement will be filed no later than 120 days after
the close of the registrant's fiscal year ended October 31, 2001.
Explanatory Note
This Amendment No. 2 to the Annual Report on Form 10-K of Massey Energy
Company for the fiscal year ended October 31, 2001, is being filed to make
certain changes as agreed to in discussions with the Securities and Exchange
Commission in connection with its review and comment on our reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934. This
Amendment No. 2 amends and restates Items 1, 2, 3 and 4 of Part I, Items 5, 6, 7
and 8 of Part II and Item 10 of Part III of the Registrant's Annual Report on
Form 10-K for the year ended October 31, 2001, as filed by the Registrant on
January 29, 2002.
The principal changes include amendments to financial information and
disclosures to:
(1) Restate financial statements to retroactively adopt and apply a service
period approach as described in Statement of Financial Accounting
Standards (SFAS) No. 106, Employers Accounting for Postretirement Benefits
other than Pensions and as allowed by Statement of Financial Accounting
Standards (SFAS) No. 112 Employers' Accounting for Postemployment Benefits
to the Company's obligations with respect to coal workers' pneumoconiosis
(black lung). Previously, the Company utilized a different actuarial
approach, which has been determined to be not in accordance with GAAP.
This accounting policy change has been implemented effective November 1,
1994, the first date under which the Company was required to implement
SFAS No. 112.
Trust assets previously offset against the Company's black lung
liability have been reclassified to other current assets and accounted for
under SFAS No. 115 Accounting for Certain Investments in Debt and Equity
Securities.
The restatement (change in black lung expense net of realized gains on
reclassified trust assets) changes net income in each year presented as
follows: decrease of $0.9 million in fiscal 1999, decrease of $0.3 million
in fiscal 2000, and an increase of $1.4 million in fiscal 2001. The
cumulative impact (for November 1, 1994 through October 31, 2001) of this
correction as measured by the change in retained earnings (in Shareholders
Equity) as of October 31, 2001 is zero (prior period income and expense
amounts offset). Additional balance sheet changes as of October 31, 2001
include: an increase in Black Lung liability (in Other Non-Current
Liabilities) of $2.4 million, and an increase in investments held for
resale (in Prepaid Expenses and Other Current Assets) of $2.4 million
Black lung disclosures in Note 5 to the Consolidated Financial
Statements have also been revised as appropriate.
(2) Restate 2002 financial statements to recognize a $6.9 million charge
related to the settlement of claims for delinquent workers' compensation
premiums as a subsequent event. This amount was recognized previously in
the two-month transition period ended December 31, 2001. The balance sheet
was changed as of October 31, 2001 by an increase of $2.4 million in the
accrued legal services account (in Other Current Liabilities) and by an
increase of $4.5 million in the accrued potential litigation account (in
Other Non-Current Liabilities) to reflect this correction of an error.
(3) Restate 2002 financial statements to recognize a $2.5 million charge in
connection with a wrongful employee discharge lawsuit as a subsequent
event. This amount was recognized previously in the two-month transition
period ended December 31, 2001. The balance sheet was changed as of
October 31, 2001 by an increase of $2.5 million in the accrued potential
litigation account (in Other Non-Current Liabilities) to reflect this
correction of an error.
(4) Restate Statements of Shareholders' Equity to push back assumed shares
outstanding to all previous periods presented. The balance sheet was
changed as of October 31, 2000 by an increase of $45.9 million in Common
Stock and a decrease of $45.9 million in Net Investment by Fluor
Corporation to reflect 73.5 million shares of common stock outstanding
(the number of shares outstanding on the date of the Spin-Off).
(5) Restate coal reserves in Item 1 (Mining Operations) and Item 2 (Coal
Reserves) to reflect an "as received" moisture factor of 6.5% which
results in an overall increase in reserve tonnage from 2.1 billion tons to
2.3 billion tons. As required under Industry Guide 7, this has been
reflected in all tables referencing coal reserves.
2
Information included in the original report on Form 10-K has not been
amended by this Form 10-K/A to reflect any information or events subsequent to
the filing of the original Annual Report on Form 10-K. Except as otherwise
indicated, use of words used herein such as "to date," "current" or "currently"
and "present" or "presently" shall refer to the time frame in which the original
annual report on Form 10-K for the fiscal year ended October 31, 2001 was filed.
From time to time, Massey Energy Company ("Massey" or the "Company") makes
certain comments and disclosures in reports and statements, including this
report, or statements made by its officers, 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.
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 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 below in Item 1. Business, under the heading "Business Risks."
Part I
Item 1. Business
On November 30, 2000, the Company completed a reverse spin-off (the
"Spin-Off"), which divided it into the spun-off corporation, "new" Fluor
Corporation ("New Fluor"), and Fluor Corporation, subsequently renamed Massey
Energy Company, which retained the Company's coal-related businesses. Except as
the context otherwise requires, the terms "Massey" or the "Company" as used
herein shall include Massey Energy Company, its wholly owned subsidiary, A. T.
Massey Coal Company, Inc. ("A. T. Massey"), and A. T. Massey's subsidiaries.
In the Energy Ventures Analysis ranking of coal companies by 2001 revenue,
Massey is the fifth largest coal company in the United States, and the largest
in the Central Appalachian region. Massey produces, processes and sells
bituminous, low sulfur coal of steam and metallurgical grades through its
eighteen processing and shipping centers, called "resource groups," many of
which receive coal from multiple coal mines. Massey currently operates 37
underground mines (four of which employ both room and pillar and longwall
mining) and 14 surface mines (with six highwall miners in operation) in West
Virginia, Kentucky and Virginia. Its steam coal is primarily purchased by
utilities and industrial clients as fuel for power plants. Its metallurgical
coal is used primarily to make coke for use in the manufacture of steel.
A. T. Massey was originally incorporated in Richmond, Virginia in 1920 as a
coal brokering business. In the late 1940s, A. T. Massey expanded its business
to include coal mining and processing. In 1974, St. Joe Minerals acquired a
majority interest in A. T. Massey. St. Joe Minerals was then acquired by Fluor
in 1981. A. T. Massey has been wholly owned by Fluor (now Massey) since 1987.
Massey has 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 in the coal industry. This annual report on Form 10-K will cover the
former fiscal year ending October 31, 2001. Massey will file on Form 10-Q a
report covering the transition period between the fiscal year ended October 31,
2001 and the new fiscal year beginning January 1, 2002.
3
Industry Overview
A major contributor to the world energy supply, coal represents
approximately 22% of the world's primary energy consumption. The primary use for
coal is to fuel electrical power generation. In calendar year 2000, coal was
used to generate 52% of the electricity produced in the United States.
The United States is the second largest coal producer in the world,
exceeded only by China. Other leading coal producers include India, South
Africa, and Australia. The United States is the largest holder of coal reserves
in the world, with over 250 years supply at current production rates. U.S. coal
reserves are more plentiful than oil or natural gas, with coal representing
approximately 76% of the nation's fossil fuel reserves according to Energy
Ventures Analysis. Total coal reserves are estimated by utilizing the
demonstrated coal reserve tonnage reported by the Department of Energy and
projecting the probable heat value (Btu per pound) of that tonnage compared to
the heat value of other fossil fuel energy resources.
U.S. coal production has more than doubled during the last 30 years. In
2001, total coal production as estimated by the United States Department of
Energy ("DOE") was 1.1 billion tons. The primary producing regions were the
Powder River Basin (36%), Central Appalachia (23%), Midwest (14%), Northern
Appalachia (13%), West (other than the Powder River Basin) (12%) and other (2%).
Approximately 65% of U.S. coal is produced by surface mining methods. The
remaining 35% is produced by underground mining methods that include room and
pillar mining and longwall mining.
Coal is used in the United States by utilities to generate electricity, by
steel companies to make products with blast furnaces, and by a variety of
industrial users to heat and power foundries, cement plants, paper mills,
chemical plants and other manufacturing and processing facilities. Significant
quantities of coal are also exported from both east and west coast terminals.
The breakdown of 2001 U.S. coal demand, as estimated by Resource Data
International, Inc. ("RDI"), is as follows:
End Use Tons (millions) % of Total
------- --------------- ----------
Electrical generation 1,007 86%
Industrial users 66 6%
Exports 64 6%
Steel making 27 2%
Residential & commercial 5 --%
----- ----
Total 1,169 100%
===== ===
Coal has long been favored as an electrical generating fuel because of its
basic economic advantage. The largest cost component in electrical generation is
fuel. This fuel cost is typically lower for coal than competing fuels such as
oil and natural gas. RDI estimated the average total production costs of
electricity-using coal and competing generation alternatives in 2001 as follows:
Electrical Generation Type Cost per million Kilowatt Hours
- -------------------------- -------------------------------
Natural Gas $ 6.103
Oil $ 5.480
Other (solar, wind, etc.) $ 3.503
Nuclear $ 1.749
Coal $ 1.690
Hydroelectric $ 0.464
According to RDI, 15 of the 25 lowest operating cost electrical generation
power plants in the United States during 2000 were fueled by coal. Coal used as
fuel to generate electricity is commonly referred to as "steam coal."
There are factors other than fuel cost that influence each utility's choice
of electrical generation mode, including facility construction cost, access to
fuel transportation infrastructure, environmental restrictions, and other
factors. The breakdown of U.S. electrical generation by fuel source in 2001, as
estimated by RDI, is as follows:
4
Electrical Generation Source % of Total Electrical Generation
- ---------------------------- --------------------------------
Coal 54%
Nuclear 20%
Natural Gas 15%
Hydro 8%
Oil 2%
Other 1%
----- ----
Total 100%
===
RDI projects that generators of electricity will increase their demand for
coal as demand for electricity increases. Because coal-fired generation is used
in most cases to meet base load requirements, coal consumption has generally
grown at the pace of electricity demand growth. Demand for electricity has
historically grown in proportion to U.S. economic growth.
The United States ranks second among worldwide exporters of coal. Australia
is the largest exporter, with other major exporters including South Africa,
Indonesia, Canada, Taiwan, and Colombia. U.S. exports have decreased by over 46%
since 1991 as a result of increased international competition and the U.S.
dollar's strength in comparison to foreign currencies. According to DOE, the
usage breakdown for 2000 U.S. exports of 59 million tons was 44% for electrical
generation and 56% for steel making. U.S. coal exports were shipped to more than
40 countries. The largest purchaser of exported steam coal was Canada, which
took 15 million tons or 58% of total steam coal exports. The largest purchaser
of exported metallurgical coal was Europe, which represented 20 million tons or
61% of total metallurgical coal exports.
The type of coal used in steel making is referred to as metallurgical coal,
and is distinguished by special quality characteristics that include high carbon
content, low expansion pressure, low sulfur content, and various coal chemistry
attributes. Metallurgical coal is also high in heat content (as measured in
British thermal units ("Btus")), and therefore is desirable to utilities as fuel
for electrical generation. Consequently, metallurgical coal producers have the
ongoing opportunity to select the market that provides maximum revenue. The
premium price offered by steel makers for the metallurgical quality attributes
is typically higher than the price offered by utility coal buyers that value
only the heat content. The primary concentration of U.S. metallurgical coal
reserves is located in the Central Appalachian region. RDI estimates that the
Central Appalachian region supplied 87% of domestic metallurgical coal and 97%
of U.S. exported metallurgical coal during 2000.
Industrial users of coal typically purchase high Btu products with the same
type of quality focus as utility coal buyers. The primary goal is to maximize
heat content, with other specifications like ash content, sulfur content, and
size varying considerably among different customers. Because most industrial
coal consumers use considerably less tonnage than electric generating stations,
they typically prefer to purchase coal that is screened and sized to
specifications that streamline coal handling processes. Due to the more
stringent size and quality specifications, industrial customers often pay a 10%
to 15% premium above utility coal pricing (on comparable quality). The largest
regional supplier to the industrial market sector has historically been Central
Appalachia, which supplied approximately 35% of all U.S. industrial coal demand
in 2001.
Coal shipped for North American consumption is typically sold at the mine
loading facility with transportation costs being borne by the purchaser.
Offshore export shipments are normally sold at the ship-loading terminal, with
the purchaser paying the ocean freight. According to the National Mining
Association, approximately two-thirds of U.S. coal production is shipped via
railroads. Final delivery to consumers often involves more than one
transportation mode. A significant portion of U.S. production is delivered to
customers via barges on the inland waterway system and ships loaded at Great
Lakes ports.
Neither Massey nor any of its subsidiaries is affiliated with RDI or Energy
Ventures Analysis.
Mining Methods
Massey produces coal using four distinct mining methods: underground room
and pillar, underground longwall, surface and highwall mining, which are
explained as follows:.
In the underground room and pillar method of mining, continuous miners cut
three to seven entries into the coal bed and connect them by driving crosscuts,
leaving a series of rectangular pillars, or columns of coal, to help support the
mine roof and control the flow of air. Generally, openings are driven 20 feet
wide and the pillars are up to 100 feet wide. As mining advances, a grid-like
pattern of entries and pillars is formed. When mining advances to the end of a
panel, retreat mining may begin. In retreat mining, as much coal as feasible is
mined from the pillars that were created in advancing the panel, allowing the
roof to cave. When retreat mining is completed to the mouth of the panel, the
mined panel is abandoned.
In longwall mining, a shearer (cutting head) moves back and forth across a
panel of coal typically about 1000 feet in width. The cut coal falls onto a
flexible conveyor for removal. Longwall mining is performed under hydraulic roof
supports (shields) that are advanced as the seam is cut. The roof in the mined
out areas falls as the shields advance.
5
Surface mining is used when coal is found close to the surface. This method
involves the removal of overburden (earth and rock covering the coal) with heavy
earth moving equipment and explosives, loading out the coal, replacing the
overburden and topsoil after the coal has been excavated and reestablishing
vegetation and plant life.
Highwall mining is used in connection with surface mining. A highwall
mining system consists of a remotely controlled continuous miner, which extracts
coal and conveys it via augers or belt conveyors to the surface. The cut is
typically a rectangular, horizontal opening in the highwall (the unexcavated
face of exposed overburden and coal in a surface mine) 11-feet wide and reaching
depths of up to 1000 feet. Multiple, parallel openings are driven into the
highwall, separated by narrow pillars that extend the full depth of the hole.
Use of continuous miner machines in the room and pillar method of
underground mining represented approximately 46% of Massey's 2001 coal
production.
Production from underground longwall mining operations constituted about
18% of Massey's 2001 production. Massey now operates four longwall units.
Surface mining represented approximately 29% of Massey's 2001 coal
production. Massey has established large-scale surface mines in Boone and
Nicholas counties of West Virginia. Other Massey surface mines are smaller in
scale. Massey surface mines also use highwall mining systems to produce coal
from high overburden areas. Highwall mining represented approximately 7% of
Massey's 2001 coal production.
Mining Operations
Massey currently has eighteen distinct resource groups or mining complexes,
including thirteen in West Virginia, four in Kentucky and one in Virginia. These
complexes receive, blend, process and ship coal that is produced from one or
more mines, with a single complex handling the coal production of as many as
eight distinct underground or surface mines. These mines have been developed at
strategic locations in close proximity to the Massey preparation plants and rail
shipping facilities. Coal is transported from Massey's mining complexes to
customers by means of railroad cars or trucks, with rail shipments representing
approximately 89% of 2001 coal shipments.
6
The following table provides key summary information on all Massey mining
complexes (Resource Groups) that were active in 2001.
Massey Resource Groups
Year
Resource Group Name Location 2001 Production(1) 2001 Shipments Coal Quality Reserves Established
- ------------------- -------- ------------------ -------------- ------------ -------- -----------
(000's of Tons) (000's of Tons) (000's of Tons)(2)
Delbarton Mingo County, WV 3,274 2,179 Low Sulfur Utility 296,000 1999
Low Sulfur Industrial
Eagle Energy Boone County, WV 0 192 High Vol Met 0 1996
Elk Run Boone County, WV 5,057 6,775 High Vol Met 137,000 1978
Low Sulfur Utility
Low Sulfur Industrial
Green Valley Nicholas County, WV 728 736 High Vol Met 11,000 1996
Low Sulfur Utility
Low Sulfur Industrial
Independence Boone County, WV 5,530 3,422 High Vol Met 59,000 1994
Low Sulfur Utility
Low Sulfur Industrial
Knox Creek Tazewell County, VA 525 528 High Vol Met 59,000 1997
Low Sulfur Utility
Low Sulfur Industrial
Logan County Logan County, WV 3,319 3,412 Low Sulfur Utility 94,000 1998
Low Sulfur Industrial
Long Fork Pike County, KY 0 1,779 Low Sulfur Utility 5,000 1991
Low Sulfur Industrial
Marfork Raleigh County, WV 3,817 6,015 High Vol Met 78,000 1993
Low Sulfur Utility
Low Sulfur Industrial
Martin County Martin County, KY 3,061 2,420 Low Sulfur Utility 51,000 1969
Low Sulfur Industrial
New Ridge Pike County, KY 0 1,608 Low Sulfur Utility 0 1992
Low Sulfur Industrial
Nicholas Energy Nicholas County, WV 4,696 4,581 High Vol Met 116,000 1997
Low Sulfur Utility
Low Sulfur Industrial
Omar Boone County, WV 0 1,567 Low Sulfur Utility 36,000 1954
Low Sulfur Industrial
Performance Raleigh County, WV 3,382 1,649 High Vol Met 44,000 1994
Progress Boone County, WV 3,549 1,320 Low Sulfur Utility 95,000 1998
Low Sulfur Industrial
Rawl Mingo County, WV 1,995 2,170 High Vol Met 116,000 1974
Low Sulfur Utility
Low Sulfur Industrial
Sidney Pike County, KY 6,117 2,856 Low Sulfur Utility 172,000 1984
Low Sulfur Industrial
Stirrat Logan County, WV 0 371 High Vol Met 5,000 1993
Low Sulfur Utility
Low Sulfur Industrial
Other/Unassigned N/A N/A 167 N/A 899,000 N/A
------ ------ ---------
Total 45,050 43,747 2,273,000
====== ====== =========
(1) For purposes of this table, coal production has been allocated to the
Resource Group where the coal is mined, rather than the Resource Group
where the coal is processed and shipped. Several Massey Resource Groups
provide processing and rail shipping services for coal mined at other
nearby Massey operations.
(2) Reserves allocated to individual mining complexes include both assigned
reserves and unassigned reserves that are accessible from the established
operations. Reserve information reflects a moisture factor of 6.5%. This
moisture factor represents the average moisture present on the Company's
delivered coal.
7
West Virginia Resource Groups
Delbarton. The Delbarton complex processes coal produced by a two-section,
underground room and pillar mine in the Lower Cedar Grove seam. Production from
this mine, located adjacent to the Delbarton complex, is transported to the
Delbarton preparation plant via overland conveyor. The Delbarton complex also
processes coal from the North Surface mine, a complex of four surface mines that
has highwall mining operations. The North Surface mine completed a direct ship
coal (i.e., coal that is shipped without processing) loadout on the CSX in
January 2002 that will load up to 150-car unit trains. The Delbarton preparation
plant can process 600 tons per hour of raw coal. The clean coal product is
shipped to customers via the Norfolk Southern railway in unit trains of up to
110 railcars.
Eagle Energy. The Eagle Energy complex is currently inactive but has
historically processed coal production from the adjacent underground longwall
mine in the Eagle seam. The economically accessible Eagle seam reserves were
depleted in January 2000 and the operation was idled. The Eagle Energy
preparation plant is a modern facility with a rated feed capacity of 750 tons
per hour. Customers can be served via CSX railway shipments loaded in unit
trains of up to 90 railcars. Plans are now under review to re-activate this
complex using production from new mines in seams above the Eagle seam.
Elk Run. The Elk Run complex is one of Massey's largest shippers of coal.
Elk Run produces coal from six underground room and pillar mines that deliver
coal to the preparation plant by belt and truck. Elk Run also has three surface
mines that direct ship to customers via the Kanawha River docks. Additionally,
the Elk Run complex processes coal for shipment that is produced from another
Massey resource group. The Twilight surface mine in the Progress resource group
transports all of its production to the Elk Run facilities via underground
conveyor system. The Elk Run preparation plant has a processing capacity of 2200
tons per hour. Elk Run also has a 200 ton per hour stoker facility that
processes direct ship coal from the Twilight surface mine. Customer shipments
are loaded utilizing a flood load system on the CSX rail system in unit trains
of up to 150 railcars.
Green Valley. The Green Valley complex specializes in premium quality coals
servicing industrial customers in a variety of industries. The Green Valley
preparation plant receives coal via truck that is produced from two underground
room and pillar mines in the Sewell seam. The Green Valley preparation plant has
a processing capacity of 600 tons per hour. The rail loading facility services
customers on the CSX rail system with unit train shipments of up to 75 railcars.
Independence. The Independence complex processes coal from one large
underground longwall mine and one room and pillar mine. Production from both
mines is transported via underground conveyor system directly to the
Independence preparation plant. Independence has five additional underground
mining operations that produce coal for processing and shipment by other Massey
resource groups. The Independence plant has a processing capacity of 1400 tons
per hour. Customers are served via rail shipments on the CSX rail system in unit
trains of up to 150 railcars.
Logan County. The Logan County complex operates three surface mines, one
highwall miner and two underground mines that process coal through the Bandmill
preparation plant. All three surface mines and the highwall miner deliver coal
to the Bandmill plant via truck, while both underground mines belt coal directly
to this plant. One underground mine is a room and pillar operation, while the
other is a longwall mine which started production in November 2001. The Bandmill
preparation plant, which recently has been upgraded, has a processing capacity
of 1600 tons per hour. The rail loading facility services customers via the CSX
rail system with unit train shipments of up to 150 cars.
Marfork. The Marfork complex is Massey's leading shipper of premium
metallurgical coal. The largest production source for the Marfork complex is the
Upper Big Branch underground longwall mine of Massey's Performance resource
group. Other production sources for the Marfork complex include four underground
room and pillar mines. All Marfork production sources are belted directly to the
preparation plant via conveyor systems. The Marfork preparation plant is a high
capacity processing facility that processes 2400 tons per hour. All customers
are serviced via the CSX rail system with unit trains of up to 150 railcars.
Nicholas Energy. The Nicholas Energy complex processes coal from two large
surface mines, a highwall miner and one underground room and pillar mine. All
coal from the underground mine, highwall miner, as well as the portion of
surface mined coal requiring processing, is transported to the Power Mountain
preparation plant via overland conveyor system. The Power Mountain plant has a
processing capacity of 1400 tons per hour. All coal shipments are loaded into
rail cars for delivery via the Norfolk Southern railway in unit trains of up to
140 railcars.
Omar. The Omar mining complex processes coal from adjacent mining
operations of Massey's Independence and Elk Run resource groups. All production
sources are transported via underground conveyor system to the Omar preparation
plant. The Omar plant can process 800 tons per hour. A new rail loading facility
was completed in May 2000. Omar can now service its CSX rail system customers
with unit train shipments of up to 110 railcars.
Performance. The Performance mining complex includes the Upper Big Branch
underground mine and the Goals preparation plant. The Upper Big Branch mine is a
longwall operation in the Eagle seam, with most production being processed and
shipped from Massey's Marfork resource group. The Goals preparation plant
processes the balance of the Upper Big Branch mine's production, as well as
production from adjacent underground mines of Massey's Independence resource
group. The Goals preparation plant can process 800 tons per hour. The rail
loading facility services CSX railway customers with unit trains of up to 90
railcars.
8
Progress. The Progress mining complex includes the Twilight MTR surface
mine and the adjacent Upper Big Branch surface mine, coal handling system and
stoker plant. All production from these two mines is processed through a coal
handling system and transported via underground conveyor to Massey's Elk Run
resource group for rail shipment. Progress also has two satellite operations:
West Cazy surface mine with its CSX rail loadout and the Brushy Fork contour
surface mine. West Cazy's direct ship coal is loaded onto rail at the loadout
and the coal requiring processing is transported to the Omar resource group. The
Brushy Fork coal is transported to either the Marfork or Elk Run resource group
for processing and shipping.
Rawl. The Rawl complex includes five underground room and pillar mines and
the Sprouse Creek Processing plant. Four mines transport coal to the Sprouse
Creek plant--three via trucks and one via short-tagged rail cars. The other mine
produces coal that is processed for shipment by Massey's Stirrat resource group.
The Sprouse Creek preparation plant has a throughput capacity of 1450 tons per
hour. Customers are serviced via the Norfolk Southern railway with unit trains
of up to 150 railcars.
Stirrat. The Stirrat complex processes coal produced by the Diamond Energy
mine of Massey's Rawl resource group. All production is transported via belt
line to the Stirrat preparation plant. The plant has a rated capacity of 600
tons per hour. Customers are serviced via the CSX rail system with unit trains
of up to 100 railcars.
Kentucky Resource Groups
Long Fork. The Long Fork complex processes coal produced by the adjacent
Rockhouse and Solid Energy mines of Massey's Sidney resource group. All
production is transported via overland conveyor system to the Long Fork
preparation plant. The Long Fork plant has a rated capacity of 1500 tons per
hour. The rail loading facility services customers on the Norfolk Southern
railway with unit trains of up to 150 railcars.
Martin County. Production at the Martin County complex comes from two
underground mines, a four-unit surface mine and one highwall miner unit.
Approximately 70% of the production from the surface mine is saleable without
processing and is shipped to customers at the Ohio/Big Sandy river docks via
truck. The balance of the surface mined coal and all of the coal from the
highwall miner and the underground mines is processed before going to market.
Martin County's preparation plant, with a throughput capacity of 1500 tons per
hour, was restarted in April 2001 after having been idled because of the failure
of the coal waste impoundment on October 11, 2000. See Item 3. Legal Proceedings
for further discussion on the impoundment failure. All coal processed through
the preparation plant is shipped via the Norfolk Southern railway in unit trains
of up to 125 railcars.
New Ridge. The New Ridge complex processes coal that is transported via
truck from mining operations of Massey's Sidney resource group. The New Ridge
preparation plant has a throughput capacity of 800 tons per hour. All coal is
loaded for shipment to customers via the CSX rail system in unit trains of up to
100 railcars.
Sidney. The Sidney complex includes six underground room and pillar mines,
the Rockhouse longwall mine, a surface mine and the Big Creek preparation plant.
Two of the mines truck coal to Massey's New Ridge complex, two transport coal
via underground conveyor to Massey's Long Fork resource group for processing and
shipment, and the remainder of the mines transport production via underground
conveyor or truck to the Big Creek plant. The Big Creek preparation plant has a
throughput capacity of 1500 tons per hour. The Sidney rail loading facility
services customers on the Norfolk Southern rail system with unit trains of up to
140 railcars.
Virginia Resource Group
Knox Creek. The Knox Creek complex processes coal from one underground room
and pillar mine. Production from the Tiller No. 1 mine is belted directly to the
Knox Creek preparation plant. The Knox Creek plant has a feed capacity of 650
tons per hour. The rail loading facility services customers on the Norfolk
Southern rail system with unit trains of up to 100 railcars.
Other Related Operations
Massey has other related operations and activities in addition to its
normal coal production and sales business. The following business activities are
included in this category:
Appalachian Synfuel Plant: On March 15, 2001, Massey sold a substantial
interest in Appalachian Synfuel, LLC ("Appalachian Synfuel"). See Note 13 to the
Consolidated Financial Statements for further discussion on the sale.
Appalachian Synfuel owns a synthetic fuel manufacturing facility operated by
Massey's Marfork resource group and located adjacent to the Marfork complex in
Boone County, West Virginia. This facility converts coal products to synthetic
fuel and has operated since June 1998. Appalachian Synfuel has obtained a
private letter ruling from the IRS that provides that production from this
synfuel facility qualifies the owner for tax credits pursuant to Section 29 of
the Code. Synthetic fuel sales by Appalachian Synfuel during fiscal year 2001
were 434,056 tons.
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Westvaco Coal Handling Facility: Massey subsidiaries own and operate the
coal unloading, storage and conveying facilities at Westvaco Corporation's paper
manufacturing facility in Covington, Virginia ("Westvaco CHF"). The Westvaco CHF
was constructed by Massey in 1992 as a means of reducing coal transportation and
handling costs for Westvaco Corporation, a long term industrial coal customer.
The Westvaco CHF operating agreement extends through 2007, and provides for
Massey to be paid a per ton fee (annually adjusted) for coal handling services
and allows Massey to supply 100% of the coal required by Westvaco's facility.
Eastman Chemical Company Coal Handling System: Massey subsidiaries are
constructing and will own and operate coal unloading, storage and conveying
facilities at Eastman Chemical Company's facility in Kingsport, Tennessee (the
"Eastman CHS"). The Eastman CHS operating agreement will extend for fifteen
years after completion of construction and provides that Massey will be paid
certain fixed and/or per ton fees for leasing equipment, coal handling services
and for operating and maintaining the Eastman CHS. Massey estimates that the
Eastman CHS will be completed in September 2002.
Other: Massey also engages in the sale of certain non-strategic assets such
as timber, gas & oil rights as well as the sale of non-strategic surface
properties and reserves.
Marketing and Sales
The Massey marketing and sales force, based in the corporate office in
Richmond, Virginia, includes sales managers, distribution/traffic managers,
technical support and administrative personnel.
During the fiscal year ended October 31, 2001, Massey sold 43.7 million
tons of produced coal for total produced coal revenue of $1.2 billion. The
breakdown of produced tons sold by market served was 60% utility, 30%
metallurgical and 10% industrial. Sales were concluded with over 125 customers.
Export shipments (including Canada) represented approximately 20% of 2001
tonnage sold. Massey's 2001 export shipments serviced customers in 10 countries
across North America, South America, Europe and Asia. Almost all sales are made
in U.S. dollars, which eliminates foreign currency risk.
The Company has established several contractual arrangements with customers
wherein services other than coal supply are provided on an ongoing basis. Such
other services include coal handling and coal consignment services. Examples of
such arrangements, none of which is considered to be material, include:
o The Westvaco CHF and the Eastman CHS (described above). The Company
derives less than 1% of its total revenue through the coal handling
services it provides in connection with the Westvaco CHF arrangement.
The Company receives a $/mmBtu price for providing all of the coal
and the transportation and handling of the coal to the Westvaco CHF.
The Company will derive less than 1% of its total revenue through the
Eastman CHS arrangement when the facility is operational (expected in
September 2002). The Company will receive coal handling, facility
maintenance and facility lease fees at the Eastman CHS.
o At two large steel companies, one synthetic fiber manufacturer and one
tobacco processing plant, a Massey subsidiary coordinates shipment of
coal to the customer's stockpile, maintains
ownership of the coal inventory on site and sells tonnage to the
customer as it is consumed, the point at which title to the coal is
transferred to the purchaser.
Other services of the type described herein are provided periodically in
response to the current needs of each individual customer.
Distribution
Massey employs transportation specialists who negotiate freight and
terminal agreements with various providers, including railroads, barge lines,
steamship lines, bulk motor carriers and terminal facilities. Transportation
specialists also coordinate with customers, mining facilities and transportation
providers to establish shipping schedules that meet the customer's needs.
Massey's 2001 shipments of 43.7 million tons were loaded from 18 mining
complexes. Rail shipments constituted 89% of total shipments, with 32% loaded on
Norfolk Southern trains and 57% loaded on CSX trains. The 11% balance was
shipped from Massey mining complexes via truck.
Approximately 16% of Massey's production is ultimately delivered via the
inland waterway system. Coal is transported by rail or truck to docks on the
Ohio, Big Sandy and Kanawha Rivers and then ultimately transported by barge to
electric utilities, integrated steel producers and industrial consumers served
by the inland waterway system. Massey also moves approximately 13% of its
production to Great Lakes Ports for transport beyond to various U.S. and
Canadian customers.
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Customers and Coal Contracts
Massey has coal supply commitments with a wide range of electric utilities,
steel manufacturers, industrial customers and energy traders and brokers. The
majority of Massey's customers purchase coal for terms of one year or longer,
but Massey also supplies coal on a spot basis for some of its customers.
Massey's biggest customer, Duke Energy, accounted for 11% of Massey's fiscal
year 2001 produced coal revenue. Massey has been serving this customer for over
thirty years and has agreements in place to continue to supply coal through June
2003.
Massey has contracts to supply coal to energy trading and brokering
companies under which those companies sell such coal to the ultimate users. One
of Massey's energy trading and brokering customers, Enron Corp., filed for
bankruptcy protection in December 2001 and Massey has reserved $7.5 million in
connection with that bankruptcy.
As the largest supplier of metallurgical coal to the American steel
industry, Massey is subject to being adversely affected by any decline in the
financial condition or production volume of American steel producers. Recently,
American steel producers have experienced a substantial decline in the prices
received for their products, due at least in part to a heavy volume of foreign
steel imported into this country. As a result, several large American producers
filed for bankruptcy protection, including two substantial customers of Massey:
Wheeling-Pittsburgh Steel Corporation, accounting for approximately 2% of the
Company's produced coal revenue in fiscal year 2001, which filed for bankruptcy
protection in late 2000, and Bethlehem Steel Corporation, accounting for
approximately 3% of the Company's produced coal revenue in fiscal year 2001,
which filed for bankruptcy protection in mid-2001. In addition, Algoma Steel,
Inc., a Canadian steel producer and a customer of Massey, filed for bankruptcy
protection under Canadian law. Sales to Algoma accounted for approximately 3% of
the Company's produced coal revenue in fiscal year 2001. Further deterioration
in conditions in the steel industry could reduce the demand for Massey's
metallurgical coal and impact the collectibility of Massey's accounts receivable
from steel industry customers. Since Massey's metallurgical grade coal can also
be marketed as a high-Btu steam coal for use by utilities, a decline in the
metallurgical market could result in coal being switched from the metallurgical
market to the utility market.
As is customary in the coal industry, Massey continually enters into
long-term contracts (exceeding one year in duration) with many of its customers.
These arrangements allow customers to secure a supply for their future needs and
provide Massey with greater predictability of sales volume and sales prices. As
of January 28, 2002, the Company had approximately 86% of its fiscal year 2002
planned production committed under long-term arrangements. For the fiscal year
ended October 31, 2001, approximately 92% of our produced coal sales volume was
pursuant to long-term contracts. The Company believes that in fiscal 2002, the
percentage of produced coal sales pursuant to long-term arrangements will be
comparable with the percentage of produced coal sales for 2001.
By offering coal of both metallurgical and steam grades, Massey is able to
serve a diverse customer base. This market diversity allows Massey to adjust to
changing market conditions and sustain high sales volumes.
The terms of Massey's long-term contracts are a result of extensive
negotiations with the customer. As a result, the terms of these contracts vary
with respect to price adjustment mechanisms, pricing terms, permitted sources of
supply, force majeure provisions, quality adjustments and other parameters. Most
of the contracts contain price adjustment mechanisms that allow for changes to
prices based on statistics from the U.S. Department of Labor. Contracts contain
specifications for coal quality, which may be especially stringent for steel
customers. Many of these contracts also specify the approved locations from
which the coal is to be mined.
Competition
The coal industry in the United States is highly competitive. Massey
competes with other large producers and many small coal producers. Massey
competes with other producers primarily on the basis of price, coal quality,
transportation cost and reliability of supply. Continued demand for coal is also
dependent on factors outside Massey's control, including demand for electricity,
environmental and governmental regulations, weather, technological developments
and the availability of alternative fuel sources.
The price at which the Company's production can be sold is dependent upon a
variety of factors, many of which are beyond the Company's control. The Company
sells coal under long-term contracts and on the spot market. See the "Customers
and Coal Contracts" section above. Generally, the relative competitiveness of
coal vis-a-vis other fuels or other coals is evaluated on a delivered cost per
heating value unit basis. In addition to competition from other fuels, coal
quality, the marginal cost of producing coal in various regions of the country
and transportation costs are major determinants of the price for which the
Company's production can be sold. Factors that directly influence production
cost include geological characteristics (including seam thickness), overburden
ratios, depth of underground reserves, transportation costs and labor
availability and cost. The Company's central Appalachian coal is more expensive
to mine than western coal because there is a high percentage of underground coal
in the east and eastern surface coal tends to have thinner coal seams.
Additionally, underground mining has higher labor (including reserves for future
costs associated with labor benefits and health care) and capital (including
11
modern mining equipment and construction of extensive ventilation systems) costs
than those of surface mining. In recent years, increased development of large
surface mining operations, particularly in the western United States, and more
efficient mining equipment and techniques, have contributed to excess coal
production capacity in the United States. Competition resulting from excess
capacity has encouraged producers to reduce prices and to pass productivity
gains through to customers. The lower production cost in the western mines is
offset somewhat by the higher quality of many eastern coals and higher
transportation cost from these western mines to many coal-fired power plants in
the country. Demand for the Company's low sulfur coal and the prices that the
Company will be able to obtain for it will also be affected by the price and
availability of high sulfur coal, which can be marketed in tandem with emissions
allowances. Intraregional and interregional competition is keen as producers
seek to position themselves as the low-cost producer and supplier of high-demand
product to the electricity generating industry.
Transportation costs are another fundamental factor affecting coal industry
competition. Coordination of the many eastern loadouts, the large number of
small shipments, terrain and labor issues all combine to make shipments
originating in the eastern United States inherently more expensive on a per-mile
basis than shipments originating in the western United States. Historically,
coal transportation rates from the western coal producing areas into central
Appalachian markets limited the use of western coal in those markets. More
recently, however, lower rail rates from the western coal producing areas to
markets served by eastern producers have created major competitive challenges
for eastern producers. Barge transportation is the lowest cost method of
transporting coal long distances in the eastern United States, and the large
numbers of eastern producers with river access keep coal prices competitive. The
Company believes that many utilities with plants located on the Ohio River
system are well positioned for deregulation as competition for river shipments
should remain high for central Appalachian coal. The Company believes that with
close proximity to competitively-priced central Appalachian coal and the ability
to receive western coals, utilities with plants located on the Ohio River system
will become price setters in a deregulated environment. The ability of these
utilities to blend western and eastern coal will also create a new, dynamic fuel
procurement environment that could place western and eastern coals in even
greater competition and limit rail price premiums. River transport is an
important transportation option not available to Powder River Basin producers
between Wyoming and midwestern river terminals.
Although undergoing significant consolidation, the coal industry in the
United States remains highly fragmented. There can be no assurance that the
Company's costs will permit it to compete effectively with other producers
seeking to provide coal to a customer; however, the Company expects to be able
to maintain low production costs, offer a variety of products and have access to
multiple transportation systems that will enable it to compete effectively with
other producers.
Employees and Labor Relations
As of October 31, 2001, Massey had 5,004 employees, including 165 employees
affiliated with the United Mine Workers of America. Relations with employees are
generally good, and there have been no material work stoppages in the past ten
years.
Environmental, Safety and Health Matters
Massey is subject to federal, state and local laws and regulations relating
to environmental protection and plant and mine safety and health, including but
not limited to the federal Surface Mining Control and Reclamation Act of 1977;
Occupational Safety and Health Act; Mine Safety and Health Act of 1977; Water
Pollution Control Act, as amended by the Clean Water Act; the Clean Air Act;
Black Lung Benefits Revenue Act of 1977; and Black Lung Benefits Reform Act of
1977. Massey is rarely subject to permitting or enforcement under the Resource
Conservation and Recovery Act ("RCRA") or the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") and does not consider the
effects of those statutes on its operations to be material for purposes of
disclosure. Additional disclosure regarding the Clean Air Act and the Clean
Water Act is found later in this section and under the "Business Risks"
subsections entitled "The Clean Air Act affects Massey's customers and could
influence their purchasing decisions" and "Massey is subject to the Clean Water
Act which imposes monitoring and reporting obligations". Additional disclosure
concerning black lung benefits is found under the "Business Risks" subsection
entitled "Governmental regulations increase Massey's costs and may discourage
customers from buying Massey's coal."
The Surface Mining Control and Reclamation Act, which is administered by
the Office of Surface Mining Reclamation and Enforcement, establishes mining,
environmental protection and reclamation standards for all aspects of surface
mining as well as many aspects of deep mining. The Surface Mining Control and
Reclamation Act and similar state statutes require, among other things, the
restoration of mined property in accordance with specified standards and an
approved reclamation plan. In addition, the Abandoned Mine Land Fund, which is
part of the Surface Mining Control and Reclamation Act, imposes a fee on all
current mining operations, the proceeds of which are used to restore mines
closed before 1977. The maximum tax is $0.35 per ton on surface-mined coal and
$0.15 per ton on deep-mined coal. A mine operator must submit a bond or
otherwise secure the performance of these reclamation obligations. Mine
operators must receive permits and permit renewals for surface mining operations
from the Office of Surface Mining Reclamation and Enforcement or, where state
regulatory agencies have adopted federally approved state programs under the
Act, the appropriate state regulatory authority. The Company accrues for
reclamation and mine-closing liabilities. It accrues for the costs of current
mine disturbance and final mine closure, including the cost of treating mine
water discharge as coal is mined, on a unit-of-production basis over the
proven and probable reserves as defined in Industry Guide 7.
12
Massey's operations are principally regulated under surface mining permits
issued pursuant to the Surface Mining Control and Reclamation Act and state
counterpart laws. Such permits are issued for terms of five years with the right
of successive renewal. Massey currently has over 400 surface mining permits. In
conjunction with the surface mining permits, most operations hold National
Pollutant Discharge Elimination System permits pursuant to the Clean Water Act
and state counterpart water pollution control laws for the discharge of
pollutants to waters. These permits are issued for terms of five years and also
are renewed in conjunction with the surface mining permit renewals.
Additionally, the federal Clean Water Act requires permits for operations that
fill waters of the United States. Valley fills and refuse impoundments are
typically authorized under Nationwide Permits that are revised and renewed
periodically by the U.S. Corps of Engineers. Additionally, certain surface mines
and preparation plants have permits issued pursuant to the Clean Air Act and
state counterpart clean air laws allowing and controlling the discharge of air
pollutants. These permits are primarily permits allowing initial construction
(not operation) and they do not have expiration dates.
Massey believes it has obtained all the permits required for its current
operations under the Surface Mining Control and Reclamation Act, the Clean Water
Act and the Clean Air Act and corresponding state laws. Massey believes that it
is in compliance in all material respects with such permits, and routinely
corrects in a timely fashion violations of which it receives notice in the
normal course of operations. The expiration dates of the permits are largely
immaterial as the law provides for a right of successive renewal. The cost of
obtaining surface mining, clean water and air permits can vary widely depending
on the scientific and technical demonstrations that must be made to obtain the
permits. However, the cost of obtaining a permit is rarely more than $500,000
and of obtaining a renewal is rarely more than $5,000.
On October 20, 1999, the United States District Court for the Southern
District of West Virginia ("District Court") issued an injunction against the
West Virginia Division of Environmental Protection ("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 WVDEP in Federal Court. On July 13, 2001, the Fourth Circuit
Court of Appeals denied the plaintiffs' petition for rehearing. In October 2001,
the plaintiffs appealed the Fourth Circuit decision to the U.S. Supreme Court.
On January 22, 2002, the U.S. Supreme Court refused to hear the appeal.
Accordingly, challenges to WVDEP's enforcement of its mining program cannot be
maintained in federal court. However, challenges may be raised in state court
against WVDEP or in federal court against the federal Office of Surface Mining
("OSM"), the agency that oversees state regulation of surface mining. If and to
the extent state courts rule that the WVDEP is prohibited from issuing permits
for the construction of valley fills or federal courts rule that OSM is
compelled to impose such a prohibition on WVDEP, all or a portion of Massey's
mining operations could be affected if legislation is not passed which limits
the impact of such a ruling. Because of the uncertainties of the outcomes of the
valley fill cases, Massey cannot estimate the potential or expected impact on
our operations. We are not aware of any attempts to revoke our current valley
fill permits.
On October 11, 2000, a partial failure of Martin County Coal Corporation's
coal refuse impoundment released approximately 230 million gallons of coal
slurry into adjacent underground mine workings. The slurry then discharged into
two tributary streams of the Big Sandy River in eastern Kentucky. Clean up
efforts began immediately and are largely completed. Further information on this
matter is set forth below in Item 3, Legal Proceedings.
On June 27, 2000, the WVDEP issued an administrative order to one of
Massey's subsidiaries, Elk Run Coal Company, in connection with alleged
violations of the surface mining laws relating to dust. WVDEP has also issued
orders to various Massey subsidiaries ordering them to show cause why permits
for those subsidiaries should not be suspended or revoked because of alleged
patterns of violations relating to water quality. Further information on these
orders is set forth below in Item 3, Legal Proceedings.
The U.S. Department of Labor has issued a final rule amending the
regulations implementing the federal black lung laws which, among other things,
establish a presumption in favor of a claimant's treating physician and limit a
coal operator's ability to introduce medical evidence regarding the claimant's
medical condition. The amendments could have an adverse impact on Massey, the
extent of which cannot be accurately predicted. Further discussion is set forth
below in Business Risks--Government regulations increase Massey's costs and may
discourage customers from buying Massey's coal.
The Clean Air Act and corresponding state laws extensively regulate
emissions into the air of particulate matter and other substances, including
sulfur dioxide, nitrogen oxides and mercury. Although these regulations apply
directly to impose certain requirements for the permitting and operation of
Massey's mining facilities, by far their greatest impact on Massey and the coal
industry generally is the effect of emission limitations on utilities and other
Massey customers. The Environmental Protection Agency (the "EPA") has imposed or
attempted to impose tighter emission restrictions in a number of areas, some of
which are currently subject to litigation. The general effect of such tighter
13
restrictions could be to reduce demand for coal. In July 1997, the EPA adopted
new, more stringent National Ambient Air Quality Standards for very fine
particulate matter and ozone. As a result, some states will be required to
change their existing implementation plans to attain and maintain compliance
with the new air quality standards. Massey's mining operations and electric
generating customers are likely to be directly affected when the revisions to
the air quality standards are implemented by the states. State and federal
regulations relating to implementation of the new air quality standards may
adversely affect the market for Massey's coal with its utility customers. The
extent of the potential direct impact of the new air quality standards on the
coal industry will depend on the policies and control strategies associated with
the state implementation process under the Clean Air Act, but could have a
material adverse effect on Massey's financial condition and results of
operations. The Court of Appeals for the District of Columbia issued an opinion
in May 1999 limiting the manner in which the EPA can enforce these standards.
After a request by the federal government for a rehearing by the Court of
Appeals was denied, the Supreme Court agreed in January 2000 to review the case.
On February 27, 2001, the Supreme Court found in favor of the EPA in material
part and remanded the case to the Court of Appeals. Implementation of the fine
particulate National Ambient Air Quality Standards will occur, if at all, after
the Court of Appeals disposes of any preserved challenges to the standards and
the EPA develops a new implementation policy. The effect of this decision on
Massey and its customers is unknown at this time.
The United States has not implemented the 1992 Framework Convention on
Global Climate Change (the "Kyoto Protocol") which is intended to limit or
reduce emissions of greenhouse gases, such as carbon dioxide. Under the terms of
the Kyoto Protocol, the United States would be required to reduce emissions to
93% of 1990 levels over a five-year period from 2008 through 2012. Were the
United States to implement comprehensive regulations focusing on greenhouse gas
emissions, it would have the effect of restricting the use of coal. Other
efforts to reduce emissions of greenhouse gases and federal initiatives to
encourage the use of coalbed methane gas also may affect the use of coal as an
energy source.
It is impossible to predict the full impact of future judicial, legislative
or regulatory developments on Massey's operations because the standards to be
met, as well as the technology and length of time available to meet those
standards, continue to develop and change.
In fiscal year 2001, Massey spent approximately $8.7 million to comply with
environmental, health and safety laws and regulations, none of which
expenditures were capitalized. Massey anticipates making $5.3 million and $6.4
in such non-capital expenditures in fiscal 2002 and 2003, respectively. Of these
expenditures, $8.4 million, $4.4 million and $5.4 million for fiscal 2001, 2002
and 2003, respectively, were or are anticipated to be for surface reclamation.
The Company believes, based upon present information available to it, that
its accruals with respect to future environmental costs are adequate. For
further discussion on costs, see Note 5 to Notes to Consolidated Financial
Statements. However, the imposition of more stringent requirements under
environmental laws or regulations, new developments or changes regarding site
cleanup costs or the allocation of such costs among potentially responsible
parties, or a determination that the Company is potentially responsible for the
release of hazardous substances at sites other than those currently identified,
could result in additional expenditures or the provision of additional accruals
in expectation of such expenditures.
Business Risks
Coal markets are highly competitive and affected by factors beyond Massey's
control
Massey competes with coal producers in various regions of the United States
for domestic sales and with both domestic and overseas producers for sales to
international markets. Continued demand for Massey's coal and the prices that it
will be able to obtain primarily will depend upon coal consumption patterns of
the domestic electric utility industry and the domestic steel industry.
Consumption by the domestic utility industry is affected by the demand for
electricity, environmental and other governmental regulations, technological
developments and the price of competing coal and alternative fuel supplies
including nuclear, natural gas, oil and renewable energy sources, including
hydroelectric power. Consumption by the domestic steel industry is primarily
affected by the demand for U.S. steel. Massey's sales of metallurgical coal are
dependent on the continued financial viability of domestic steel companies and
their ability to compete with steel producers abroad.
Coal prices are affected by a number of factors and may vary dramatically by
region
Coal prices are influenced by a number of factors and may vary dramatically
by region. The two principal components of the price of coal are the price of
coal at the mine, which is influenced by mine operating costs and coal quality,
and the cost of transporting coal from the mine to the point of use. The cost of
mining the coal is influenced by geologic characteristics such as seam
thickness, overburden ratios and depth of underground reserves. Underground
mining is generally more expensive than surface mining as a result of high
capital costs, including costs for modern mining equipment and construction of
extensive ventilation systems and higher labor costs due to lower productivity.
Massey currently engages in four principal coal mining techniques: underground
"room and pillar" mining, underground longwall mining, surface mining and
highwall mining. Because underground longwall mining, surface mining and
14
highwall mining are high-productivity, low-cost mining methods, it seeks to
increase production from its use of these methods to the extent permissible and
cost effective. The Company presently operates 37 active underground mines,
including four longwall mines, and 14 active surface mines. For the 12-month
period ended October 31, 2001, the Company's production originated 29% from
surface mines, 7% from highwall miners, 18% from longwall underground mines, and
46% from other underground mines. In the event the valley fill litigation
discussed above in "Environmental, Safety and Health Matters" is upheld, the
cost of surface mining would be negatively impacted.
Massey depends on continued demand from its customers
Reduced demand from Massey's largest customers could have an adverse impact
on Massey's ability to achieve its projected revenue. When Massey's contracts
with its customers reach expiration, there can be no assurance that the
customers either will extend or enter into new long-term contracts or, in the
absence of long-term contracts, that they will continue to purchase the same
amount of coal as they have in the past or on terms, including pricing terms, as
favorable as under existing agreements.
Union represented labor creates an increased risk of work stoppages and
higher labor costs
At October 31, 2001, less than 5% of Massey's total workforce was
represented by the United Mine Workers of America. Eight of Massey's coal
processing plants and one of its smaller surface mines have a workforce that is
represented by a union. In fiscal 2001, these eight processing plants handled
approximately 33% of Massey's coal production. There may be an increased risk of
strikes and other related work actions, in addition to higher labor costs,
associated with these operations. Massey has experienced some union organizing
campaigns at some of its open shop facilities within the past five years. If
some or all of Massey's current open shop operations were to become union
represented, Massey could incur additional risk of work stoppages and higher
labor costs.
Transportation disruptions could impair Massey's ability to sell coal
Massey's transportation providers are important in order to provide access
to markets. Disruption of transportation services because of weather-related
problems, strikes, lockouts or other events could temporarily impair Massey's
ability to supply coal to customers.
The State of West Virginia has recently increased enforcement of weight
limits on coal trucks on its public roads. Although Massey has historically
avoided public road trucking of coal when possible by transporting coal by rail,
barge and conveyor systems, such stepped up enforcement actions could result in
shipment delays and increased costs.
Fluctuations in transportation costs could affect the demand for Massey's
coal
Transportation costs represent a significant portion of the delivered cost
of coal and, as a result, the cost of delivery is a critical factor in a
customer's purchasing decision. Increases in transportation costs could make
coal a less competitive source of energy. Such increases could have a material
adverse effect on Massey's ability to compete with other energy sources and on
its business, financial condition and results of operations. On the other hand,
significant decreases in transportation costs could result in increased
competition from coal producers in other parts of the country. For instance,
coal mines in the western United States could become an attractive source of
coal to consumers in the eastern part of the country if the costs of
transporting coal from the west were significantly reduced.
Foreign currency fluctuations could adversely affect the competitiveness of
Massey's coal abroad
Massey relies on customers in other countries for a portion of its sales,
with shipments to countries in Europe, North America, South America and Asia.
Massey competes in these international markets against coal produced in other
countries. Coal is sold internationally in U.S. dollars. As a result, mining
costs in competing producing countries may be reduced in U.S. dollar terms based
on currency exchange rates, providing an advantage to foreign coal producers.
Currency fluctuations in producing countries could adversely affect the
competitiveness of U.S. coal in international markets.
Coal mining is subject to inherent risks
Massey's operations are subject to certain events and conditions which
could disrupt operations, including fires and explosions from methane,
accidental minewater discharges, natural disasters, equipment failures and
maintenance problems, flooding, changes in geologic conditions, failure of
reserve estimates to prove correct and inability to acquire mining rights or
permits. Massey maintains business interruption insurance and property and
general liability insurance policies that provide limited coverage for some, but
not all, of these risks. Even where insurance coverage applies, there can be no
assurance that these risks would be fully covered by Massey's insurance
policies.
Government regulations increase Massey's costs and may discourage customers
from buying Massey's coal
Numerous governmental permits and approvals are required for coal mining
operations. Massey may be required to prepare and present to federal, state and
local authorities more extensive data describing the effect or impact that any
proposed mining operations may have upon the environment. For example, the West
Virginia Division of Environmental Protection is involved in litigation
regarding its alleged failure to consider the hydrologic effects of mining
operations in issuing mining permits. This suit could lead to additional
requirements that Massey and other mining companies assess potential hydrologic
risks. These and any other increased requirements may be costly and
time-consuming and may delay commencement or continuation of mining operations.
15
New legislation and new regulations may be adopted which could materially
adversely affect Massey's mining operations, cost structure or its customers'
ability to use coal. New legislation and new regulations may also require Massey
or its customers to change operations significantly or incur increased costs.
The U.S. Environmental Protection Agency (the "EPA") has undertaken broad
initiatives aimed at increasing compliance with emissions standards and to
provide incentives to customers for decreasing emissions, often by switching to
an alternative fuel source.
Under federal black lung benefits legislation, each coal mine operator is
required to make payments of black lung benefits or contributions to: (i)
current and former coal miners totally disabled from black lung disease; (ii)
certain survivors of a miner who dies from black lung disease; and (iii) a trust
fund for the payment of medical expenses to claimants whose last mine employment
was before January 1, 1970, where no responsible coal mine operator has been
identified for claims (where a miner's last coal employment was after December
31, 1969), or where the responsible coal mine operator has defaulted on the
payment of such benefits. In recent years, legislation on black lung reform has
been introduced but not enacted in Congress. It is possible that this
legislation will be reintroduced for consideration by Congress. If any of the
proposals included in this or similar legislation is passed, the number of
claimants who are awarded benefits could significantly increase. Any such
changes in black lung legislation, if approved, could adversely affect Massey's
business, financial condition and results of operations.
In addition, the United States Department of Labor issued a final rule,
effective January 19, 2001, amending the regulations implementing federal black
lung laws. The amendments give greater weight to the opinion of the claimant's
treating physician, expand the definition of black lung disease and limit the
amount of medical evidence that can be submitted by claimants and respondents.
The amendments also alter administrative procedures for the adjudication of
claims, which, according to the Department of Labor, result in streamlined
procedures that are less formal, less adversarial and easier for participants to
understand. These and other changes to the black lung regulations could
potentially increase Massey's exposure to black lung benefits liabilities. The
Company, with the help of its consulting actuaries, intends to monitor claims
activity very closely and will modify the assumptions underlying the projection
of its black lung liability should the results of such monitoring indicate it
appropriate to do so. The National Mining Association challenged the amendments
in the United States District Court for the District of Columbia. On August 9,
2001, the Court lifted a temporary injunction blocking the Labor Department's
processing of black lung benefit claims after dismissing the National Mining
Association's challenge to the amendments and upheld the new regulations. The
National Mining Association has appealed this decision to the United States
Court of Appeals for the District of Columbia Circuit.
The Clean Air Act affects Massey's customers and could influence their
purchasing decisions
The Clean Air Act and corresponding state laws extensively regulate
emissions into the air of particulate matter and other substances, including
sulfur dioxide, nitrogen oxides and mercury. In order to comply with limitations
on emissions, Massey's customers may switch to other fuels or coal from other
regions.
The Clean Air Act affects coal mining operations by requiring utilities
that currently are major sources of nitrogen oxides in moderate or higher ozone
nonattainment areas to install reasonably available control technology. In July
1997, the EPA adopted new, more stringent National Ambient Air Quality Standards
for particulate matter and ozone. The adoption and implementation of these more
stringent standards have been challenged in litigation and the outcome of that
challenge is uncertain at this time. The specific provisions of these standards
could be revised by the EPA.
In October 1998, the EPA issued its final rule entitled "Finding of
Significant Contribution and Rulemaking for Certain States in the Ozone
Transport Assessment Group Region for Purposes of Reducing Regional Transport of
Ozone" (the NOx SIP Call rule). In the final rule, the EPA found that sources in
22 states and the District of Columbia emit NOx in amounts that significantly
contribute to nonattainment of National Ambient Air Quality Standards, or will
interfere with maintenance of those standards, in one or more downwind states.
The rule requires the 22 upwind states and the District of Columbia to submit
state implementation plan revisions to prohibit specified amounts of emissions
of oxides of nitrogen (NOx)--one of the precursors to ozone (smog)
pollution--for the purpose of reducing NOx and ozone transport across state
boundaries in the eastern half of the United States. Although states may choose
any mix of pollution reduction measures that will achieve the required
reductions, it is widely anticipated that states will target large utility and
industrial boilers, which could materially reduce the demand for coal by these
users.
Additionally, the EPA has granted petitions filed by four northeast states
under section 126 of the Clean Air Act. The granting of these petitions means
that stationary sources located in upwind states--mostly coal-fired
16
utilities--must reduce their emissions of NOx. The deadline for compliance under
the section 126 petitions is May 2003.
The EPA has filed suit against a number of leading electric utilities
(including Massey customers) in U.S. District Court, asserting that these
utilities must install new emission controls at plants previously
"grandfathered" from the more stringent requirements now applicable under the
New Source Review program of the Clean Air Act. The EPA is also pursuing an
administrative proceeding against the Tennessee Valley Authority on the same
basis. Installation of these controls would require very significant capital
investment, and some utilities might choose to switch to non-coal generation
rather than make such investment. This could materially decrease the demand for
coal.
The passage of legislation responsive to the Framework Convention on Global
Climate Change could have an adverse effect on Massey's business
The United States has not implemented the 1992 Framework Convention on
Global Climate Change ("Kyoto Protocol") which is intended to limit emissions of
greenhouse gases, such as carbon dioxide. However, continuing international and
federal efforts to control greenhouse gas emissions could result in reduced use
of coal if electric power generators switch to lower carbon sources of fuel.
Massey is subject to the Clean Water Act which imposes monitoring and
reporting obligations
The federal Clean Water Act affects coal mining operations by imposing
restrictions on discharge of pollutants into waters and dredging and filling of
wetlands. Regular monitoring, as well as compliance with reporting requirements
and performance standards, are preconditions for the issuance and renewal of
permits governing the discharge of pollutants into water.
On October 20, 1999, the U.S. District Court for the Southern District of
West Virginia issued an injunction which prohibits the construction of valley
fills over both intermittent and perennial stream segments as part of mining
operations. See discussion above under Item 1, Environmental, Safety and Health
Matters.
Deregulation of the electric utility industry could lead to efforts to
reduce coal prices
Deregulation of the electric utility industry, when implemented, will
enable industrial, commercial and residential customers to shop for the lowest
cost supply of electricity. This fundamental change in the power industry may
result in efforts to reduce coal prices.
Severe weather may affect Massey's ability to mine and deliver coal
Severe weather, including flooding and excessive ice or snowfall, when it
occurs, can adversely affect Massey's ability to produce, load and transport
coal.
A Shortage of skilled labor in the Central Appalachian and industry poses a
risk to achieving high labor productivity and competitive costs.
Coal mining continues to be a labor intensive industry. In 2001, a shortage
of trained coal miners developed in the Central Appalachian region. The lack of
skilled miners could have an adverse impact on Massey's labor productivity and
cost and its ability to expand production.
Item 2. Properties
Operations of Massey and its subsidiaries are conducted in both owned and
leased properties totaling approximately 900,000 acres in West Virginia,
Kentucky, Virginia and Tennessee. In addition, certain owned or leased
properties of Massey and its subsidiaries are leased or subleased to third party
tenants. Massey's current practice is to obtain a title review from a licensed
attorney prior to purchasing or leasing property. It generally has not obtained
title insurance in connection with acquisitions of coal reserves. In many cases,
property title is warranted by the seller or lessor. Separate title confirmation
sometimes is not required when leasing reserves where mining has occurred
previously. Massey and its subsidiaries currently own or lease the equipment
that is utilized in their mining operations. The following table describes the
location and general character of the major existing facilities, exclusive of
mines, coal preparation plants and their adjoining offices.
Administrative Offices:
Richmond, Virginia Owned Massey Corporate Headquarters
Charleston, West Virginia Leased Massey Coal Services Headquarters
Coal Reserves
Massey estimates that, as of October 31, 2001, it had total recoverable
reserves of approximately 2.3 billion tons consisting of both proven and
probable reserves. "Reserves" are defined by Securities and Exchange Commission
Industry Guide 7 as that part of a mineral deposit which could be economically
and legally extracted or produced at the time of the reserve determination.
17
"Recoverable" reserves means coal that is economically recoverable using
existing equipment and methods under federal and state laws currently in effect.
Approximately 1.5 billion tons of Massey's reserves are classified as proven
reserves. "Proven (Measured) Reserves" are defined by Securities and Exchange
Commission Industry Guide 7 as reserves for which (a) quantity is computed from
dimensions revealed in outcrops, trenches, workings or drill holes; grade and/or
quality are computed from the results of detailed sampling and (b) the sites for
inspection, sampling and measurement are spaced so closely and the geologic
character is so well defined that size, shape, depth and mineral content of
reserves are well-established. The remaining 0.8 billion tons of Massey's
reserves are classified as probable reserves. "Probable Reserves" are defined by
Securities and Exchange Commission Industry Guide 7 as reserves for which
quantity and grade and/or quality are computed from information similar to that
used for proven (measure) reserves, but the sites for inspection, sampling, and
measurement are farther apart or are otherwise less adequately spaced. The
degree of assurance, although lower than that for proven (measured) reserves, is
high enough to assume continuity between points of observation.
Information about Massey's reserves consists of estimates based on
engineering, economic and geological data assembled and analyzed by its internal
engineers, geologists and finance associates. Reserve estimates are updated
annually using geologic data taken from drill holes, adjacent mine workings,
outcrop prospect openings and other sources. Coal tonnages are categorized
according to coal quality, seam thickness, mineability and location relative to
existing mines and infrastructure. In accordance with applicable industry
standards, proven reserves are those for which reliable data points are spaced
no more than 2,700 feet apart. Probable reserves are those for which reliable
data points are spaced 2,700 feet to 7,900 feet apart. Further scrutiny is
applied using geological criteria and other factors related to profitable
extraction of the coal. These criteria include seam height, roof and floor
conditions, yield and marketability.
The following table provides proven and probable reserve data by state as
of October 31, 2001, as follows:
Tons % of Total
----------------- -----------------
(millions)
Southern West Virginia 1,855 82%
Eastern Kentucky 326 14
Southwestern Virginia 64 3
Southeastern Tennessee 28 1
----------------- -----------------
Total 2,273 100%
================= =================
When categorized by sulfur content, the reserve breakdown is as follows:
Tons % of Total
--------------- ---------------
(millions)
Sulfur Content
Compliance sulfur or less 1,020 45%
Greater than compliance and less than 1% 479 21
Greater than 1% sulfur and less than 2% 763 34
Greater than 2% sulfur 11 --
--------------- ---------------
Total 2,273 100%
=============== ===============
Massey's reserve holdings include high volatile metallurgical coal
reserves. Although these metallurgical coal reserves receive the highest selling
price in the current coal market when marketed to steel-making customers, they
can also be marketed as an ultra high Btu, low sulfur steam coal for electrical
generation. The categorization of Massey's coal reserves as utility/industrial
or metallurgical quality is as follows:
18
Tons % of Total
----------------- -----------------
(millions)
Coal Type
High volatile metallurgical 919 40%
Low volatile metallurgical 105 5
Utility or industrial markets 1,249 55
----------------- -----------------
Total 2,273 100%
================= =================
As with most coal-producing companies in Central Appalachia, the majority
of Massey's coal reserves are controlled pursuant to leases from third party
landowners. These leases convey mining rights to the coal producer in exchange
for a per ton or percentage of gross sales price royalty payment to the lessor.
However, a significant portion of Massey's reserve holdings are owned and
require no royalty or per ton payment to other parties. The following table
summarizes the portion of Massey reserves controlled by ownership versus lease:
Tons % of Total
----------------- -----------------
(millions)
Method of Reserve Control
Owned reserves 318 14%
Leased reserves 1,955 86
----------------- -----------------
Total 2,273 100%
================= =================
The average royalties for coal reserves from our producing properties
(owned and leased) was approximately 3.9% of produced coal revenue for the year
ended October 31, 2001.
19
The following map shows the locations of Massey's properties:
[MAP]
See Item 1. Business, of this report for additional information regarding
the coal operations and properties of Massey.
Item 3. Legal Proceedings
Harman Litigation
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 claims 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. Harman
received a jury verdict that Wellmore breached the contract and assessing $6
million in damages against Wellmore. 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 and, as a result, caused Harman
to go out of business. The plaintiffs seek unspecified compensatory and punitive
damages. Massey believes that compensatory damages, if any, are duplicative of
any damages that may be awarded in the contract action, and are limited by the
same factors as in the contract action. Massey is defending this action
vigorously and believes that it has numerous valid defenses to the claims. This
action is set for trial beginning May 28, 2002.
Environmental Protection Orders
On June 27, 2000, the WVDEP issued an administrative order to one of
Massey's subsidiaries, Elk Run Coal Company, requiring Elk Run either to suspend
operations for three days beginning July 17, 2000 or expend $100,000 on local
community improvement projects. The order was based on alleged violations of the
surface mining laws relating to dust, and Elk Run appealed the order to the West
20
Virginia Surface Mining Board. On October 25, 2000 the West Virginia Surface
Mining Board upheld the order. Elk Run has appealed the Surface Mining Board's
order to the Kanawha Circuit Court, Charleston, West Virginia. Elk Run believes
that it has good defenses to the alleged violations.
On April 3, 2001, Marfork Coal Company and the WVDEP entered into a consent
agreement to resolve two show cause orders issued to Marfork on April 28, 2000
and a third show cause order issued to Marfork on December 20, 2000. Under the
consent agreement, Marfork agreed to implement plans pertaining to dust control
and to sediment and drainage control and further agreed to contribute $100,000
to various community projects.
On August 27, 2001, Marfork Coal Company and the WVDEP entered into an
agreed order to resolve a number of alleged effluent violations occurring prior
to January 19, 2001. Pursuant to the agreement, Marfork was assessed an
administrative penalty of $148,500.
WVDEP has also issued orders to various Massey subsidiaries ordering them
to show cause why permits for those subsidiaries should not be suspended or
revoked because of alleged patterns of violations relating to water quality. A
pattern of violations can be found when there are two or more violations of a
same or similar type within a 12-month period. The show cause orders set forth
below typically involve between 3 and 5 violations in the alleged pattern. In
particular, WVDEP has issued such orders to: (1) Green Valley Coal Company, on
March 6, 2001for three notices of violation relating to effluent limits on a
refuse area permit, and on August 21, 2001 for five notices of violation
relating to effluent limits and the hydrologic balance on another refuse area
permit; (2) Marfork Coal Company, on June 7, 2001 for seven notices of violation
relating to effluent limits, the hydrologic balance and sediment control on its
refuse area permit; (3) Independence Coal Company, on August 24, 2001for three
notices of violation and three cessation orders relating to sediment control on
its preparation plant permit, on August 29, 2001 for two notices of violation
and one cessation order relating to effluent limits, refuse placement and
sediment control on its preparation plant permit, and on September 19, 2001 for
three notices of violation and one cessation order relating to drainage control
on its Justice mine permit; and (4) Omar Mining Company, on October 5, 2001 for
four notices of violation and two cessation orders relating to drainage control
and effluent limits on its joint refuse area and preparation plant permit.
Hearings for these subsidiaries to show cause why the permits should not be
suspended or revoked were held for Marfork on October 25, 2001; Green Valley on
June 14, 2001 and November 6, 2001; Independence on December 5-6, 2001; and Omar
on January 22, 2002. 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. On January
2, 2002, WVDEP entered an order finding a pattern of violations and suspending
Green Valley's above-referenced refuse area permits for three days. Green Valley
obtained a stay of enforcement of the order pending appeal and filed an appeal
of the order. On January 14, 2002, WVDEP entered an order finding a pattern of
violations and suspending operations on Marfork's refuse impoundment permit for
fourteen days. Marfork obtained a stay of enforcement of the order pending
appeal and filed an appeal of the order. When the companies became aware of the
alleged violations they were quickly remedied or abated. The companies are
vigorously defending these enforcement actions.
The potential impact on operations from a permit suspension in the show
cause proceedings varies. For example, the Green Valley operations are not
currently mining or processing coal; therefore, a suspension at those operations
would not impact earnings. At the Independence, Omar and Marfork operations,
suspensions could impact earnings to the extent that downtime cannot be offset
by increases in production and/or coal sales at other times or at other
operations. The impact of suspensions at these operations could also vary
depending on when the suspensions are served. For example, suspensions served
over weekends or during scheduled maintenance periods would have lesser impacts.
We do not believe the impact of the suspensions is likely to be material. We
have not accrued lost profits for any WVDEP show cause order detailed herein. We
would expect lost profits with respect to all of the WVDEP show cause orders not
to exceed $2 million. Historically, the remedy of revocation and bond forfeiture
has been reserved for operations that do not have the financial ability to
continue operations and conduct reclamation. The remedy of permit revocation and
bond forfeiture is used to obtain the operator's reclamation bond in order to
achieve reclamation. Given the Company's financial position, the Company
believes that its permits are not in jeopardy of revocation. The cost of
defending these matters is not material.
If the affected Massey subsidiaries are unsuccessful in defending or
reaching an acceptable resolution of these orders with the WVDEP, there is a
possibility that a suspension of operations could have a significant affect on
Massey's overall operations.
Efforts to improve the Company's environmental performance include creating
the Public and Environmental Policy Committee of the Company's Board of
Directors on July 17, 2001. Subsequently, at the Committee's direction, the
Company has initiated environmental audits, employed a former WVDEP expert to
monitor the Company's environmental compliance, hired an impoundment compliance
officer and begun changing pond sizes and drainage controls.
21
Martin County Impoundment Discharge
On October 11, 2000, a partial failure of Massey's Martin County Coal
Corporation subsidiary's coal refuse impoundment released approximately 230
million gallons of coal slurry into adjacent underground mine workings. The
slurry then discharged into two tributary streams of the Big Sandy River in
eastern Kentucky. No one was injured in the discharge. Clean up efforts began
immediately and are largely complete. The States of Kentucky and West Virginia
have issued various notices of violation related to the discharge under state
counterparts to the Surface Mining Control and Reclamation Act and the Clean
Water Act and ordered remedial measures. Fines and penalties, which may not be
covered by insurance, have not yet been assessed. The Company has begun informal
discussions with various agencies with respect to the resolution of the notices
of violation, including potential fines and penalties. On October 19, 2001, the
Company agreed to pay $225,000 to the Kentucky Fish and Wildlife Service to
settle statutory fish replacement claims.
Several lawsuits have been brought by downstream residents and other
individual plaintiffs claiming to be damaged by the spill. These suits assert
trespass, property damage, nuisance and other claims, and seek compensatory and
punitive damages. Certain of these suits seek to be certified as class action
lawsuits. These lawsuits remain in their initial stages.
Martin County Coal began processing coal again on April 2, 2001. The
Company is continuing to seek approval from the applicable agencies for
alternate refuse disposal options related to operations of Martin County Coal's
preparation plant.
As of December 31, 2001, approximately $41.9 million of cleanup costs have
been incurred, $32.5 million of which have been paid or reimbursed by insurance
companies. 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.
The following items are not included in the amount stated above for claims
not yet paid:
There are eight civil actions pending in Martin County, Kentucky,
Circuit Court, and one pending in United States District Court, Eastern
District of Kentucky, Pikeville Division, in which the plaintiffs seek
various unquantified damages allegedly resulting from the October 11, 2000
incident.
On June 26, 2001, the WVDEP filed a civil action against Martin County
Coal in the Wayne County, West Virginia, Circuit Court alleging natural
resources damages in West Virginia and alleged violations of law resulting
from the impoundment discharge. Massey is defending this action vigorously
and believes that it has numerous valid defenses to the claims.
The Federal Mine Safety and Health Administration ("MSHA") issued
various citations following the impoundment discharge, and assessed
penalties totaling approximately $110,000. The Company has contested the
violations and the penalty amount.
By Agreed Order entered in 2001, the Company is obligated to reimburse
the Federal Environmental Protection Agency ("EPA") its response costs
incurred in connection with the impoundment discharge. The Company believes
those response costs total approximately $2 million to date. The EPA has
not asserted a claim for penalties.
The Company believes it has insurance coverage applicable to these items, at
least with respect to costs other than governmental penalties, such as those
assessed by MSHA, and punitive damages, if any. One of our carriers has stated
that it believes its policy does not provide coverage for governmental penalties
or punitive damages.
22
West Virginia Workers Compensation Settlement
The West Virginia Workers Compensation Division filed suits in April 1998
against several coal companies, including several subsidiaries of Massey, for
delinquent workers' compensation premiums from the 1980s and early 1990s owed by
former contractors and licensees of such coal companies. In late 1999, the West
Virginia Workers Compensation Division agreed to dismiss these lawsuits. In
early 2001, the Affiliated Construction Trades Council filed a complaint in the
Circuit Court of McDowell County, West Virginia seeking to reinstate these
lawsuits. By opinion issued October 23, 2001, the court held that the cases
could be reinstated. In December 2001, in lieu of potentially reinstating the
lawsuits, the state of West Virginia and several coal operators, including
Massey, began discussions regarding settlement of potential claims. In January
2002, Massey agreed to settle such claims for $6.9 million payable over a period
of ten years in exchange for a release of all such claims.
Kentuckians for the Commonwealth
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 the 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 is 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.
Other Legal Proceedings
Disputes have arisen between Fluor Australia, a former subsidiary of the
Company, and its client, Anaconda Nickel, over the A$800 million Murrin Murrin
Nickel Cobalt project located in Western Australia. Anaconda's primary
contention is that the process design is defective and incapable of proper
operation. Anaconda also contends that it has suffered consequential losses,
such as loss of profit for which it seeks payment from New Fluor. Anaconda
contends that New Fluor is liable to Anaconda in the total amount of A$1.8
billion, A$1.2 billion of which is alleged consequential damages. New Fluor
vigorously disputes and rejects Anaconda's claims. The dispute is in arbitration
in Australia and an arbitration hearing is scheduled to commence in late January
2002. If and to the extent that these problems are ultimately determined to be
the responsibility of New Fluor, it anticipates recovering a substantial portion
of any award to Anaconda from available insurance. Prior to the Spin-Off, the
Company had guaranteed the subsidiary's obligations under the subsidiary's
construction agreement with Anaconda. Pursuant to an agreement between the
Company and New Fluor, New Fluor has assumed all liability and costs arising in
connection with this litigation.
Due to the Martin County impoundment discharge, flooding in July 2001 and
other events that caused significant disruptions in coal production for which
force majeure notices have been issued to customers, certain customers have
complained about short falls in coal shipments. In one instance, a customer has
demanded arbitration of its claim for damages allegedly caused by delayed coal
shipments. Several customers have agreed to defer tonnage into calendar year
2002. The Company continues to seek to resolve customer complaints through
similar arrangements. The impoundment failure at Martin County on October 11,
2000 caused the destruction of the raw coal beltline feeding the preparation
plant and led to the immediate closure of the slurry impoundment by order of
regulatory authorities. As a result, coal could not be processed through the
Martin County preparation plant and the Company was unable to fully meet its
coal sales commitments. The preparation plant was closed for six (6) months
until April 2001 when it partially resumed operation after limited alternate
slurry disposal methods were approved by the regulatory agencies. The
preparation plant was expected to process over 1 million shippable tons during
the period it was shut down. Martin County was able to send some of its coal to
Massey's Rawl Sales & Processing Co. subsidiary's Sprouse Creek preparation
plant for processing. The coal sales commitments that Massey failed to meet for
the customer that demanded arbitration due to the Martin County impoundment
discharge was approximately 523,000 tons through December 31, 2001. Among other
defenses, the Company has asserted that its inability to perform its obligations
under the contracts should be excused by reason of force majeure. Most, if not
all, of the Company's contracts with its customers include force majeure
provisions that allow the Company to suspend performance of its obligations
under the contracts due to an occurrence of an event beyond its reasonable
control, without its fault or negligence, that wholly or partially delays or
prevents the mining, preparing, loading or delivering of coal. The Company
believes that the force majeure definitions in these contracts encompass the
impoundment failure at Martin County and other events that resulted in the
Company's inability to fully perform its obligations under such contracts.
23
In addition, Massey and its subsidiaries, incident to their normal business
activities, are parties to a number of other legal proceedings. While Massey
cannot predict the outcome of these proceedings, in the opinion of Massey, any
liability arising from these matters individually and in the aggregate should
not have a material adverse effect upon the consolidated financial position,
cash flows or results of operations of Massey. The Company also is party to
numerous lawsuits and other legal proceedings related to the non-coal businesses
previously conducted by the Company but now conducted by New Fluor. Under the
terms of the Distribution Agreement entered into by the Company and New Fluor as
of November 30, 2000, in connection with the Spin-Off of New Fluor by the
Company, New Fluor has agreed to indemnify the Company with respect to all such
legal proceedings and has assumed their defense.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of the
Company through a solicitation of proxies or otherwise during the fourth quarter
of the Company's fiscal year ended October 31, 2001.
The current executive officers of Massey are:
Don L. Blankenship, Age 51
Mr. Blankenship has been a Director since 1996 and the Chairman, President
and Chief Executive Officer of Massey since November 30, 2000. He has been
Chairman, President and Chief Executive Officer of A.T. Massey Coal Company,
Inc.(1) since 1992. He was formerly the President and Chief Operating Officer of
A.T. Massey from 1990 and President of Massey Coal Services, Inc.(2) from 1989.
He joined Rawl Sales & Processing Co.(3) in 1982. He is also Director of the
National Mining Association, the Governor's Mission West Virginia Board and the
Norfolk Southern Advisory Board.
H. Drexel Short, Age 45
Mr. Short has been Senior Vice President, Group Operations of Massey since
November 30, 2000. He also has been Senior Vice President, Group Operations of
A.T. Massey since May 1995. Mr. Short was formerly Chairman of the Board and
Chief Coordinating Officer of Massey Coal Services from April 1991 to April
1995. Mr. Short joined A.T. Massey in 1981.
Dr. Stanley C. Suboleski, Age 60
Dr. Suboleski has been Vice President of Massey since January 22, 2002. He
also has been Director, Executive Vice President and Chief Operating Officer of
A.T. Massey since December 15, 2001. He joined A. T. Massey in 1981 and served
until 1988 as Vice President of Planning and Development and Treasurer. From
1988 until December 1993, he was a professor and Chairman of the Mining
Engineering program at Penn State University. From December 1993 to December
1997, he served as Vice President, Planning and Vice President, Operations
Strategy, for A.T. Massey. From 1998 until 2000 he was a professor and
Department Head of Mining and Minerals Engineering at Virginia Polytechnic
Institute and State University. He was an independent consultant from 2000 until
he returned to A. T. Massey in September 2001 as Manager - Kentucky Production.
Roger L. Nicholson, Age 41
Mr. Nicholson has been Vice President, Secretary and General Counsel of
Massey since November 30, 2000. He also has been Vice President and General
Counsel of A.T. Massey since February 2000. Mr. Nicholson joined A.T. Massey in
1995 as Assistant General Counsel. Prior to joining A.T. Massey, Mr. Nicholson
was associated with the law firm of Robinson & McElwee in Lexington, Kentucky.
Prior to that, Mr. Nicholson served as chief real estate counsel for Arch
Mineral Corporation and as vice president, secretary and general counsel of its
land-holding subsidiary, Ark Land Company.
Jeffrey M. Jarosinski, Age 41
Mr. Jarosinski has been Vice President, Finance and Chief Financial Officer
of Massey since November 30, 2000. He also has been Vice President, Finance and
Chief Financial Officer of A.T. Massey since September 1998. Mr. Jarosinski was
formerly Vice President, Taxation of A.T. Massey from 1997 to August 1998 and
Assistant Vice President, Taxation of A.T. Massey from 1993 to 1997. Mr.
Jarosinski joined A.T. Massey in 1988. Prior to joining A.T. Massey, Mr.
Jarosinski held various positions in accounting, most recently as Manager at
Womack, Burke & Associates, CPAs in Richmond, Virginia.
Baxter F. Phillips, Jr., Age 55
Mr. Phillips has been Vice President and Treasurer of Massey since November
30, 2000. He also has been Vice President and Treasurer of A.T. Massey since
October 2000. He has served as Vice President of A.T. Massey from January 1992
and, as Vice President, his responsibilities have encompassed purchasing, risk
management, benefits and administration. Mr. Phillips joined A.T. Massey in 1981
and, prior to his election as Vice President in 1992, served in the roles of
Corporate Treasurer, Manager of Export Sales and Corporate Human Resources
Manager. Prior to joining A.T. Massey, Mr. Phillips' background included banking
and investments.
24
Madeleine M. Curle, Age 42
Ms. Curle has been Vice President, Human Resources of Massey since November
30, 2000. She also has been Vice President, Human Resources of A.T. Massey since
May 2000. Ms. Curle was formerly Vice President, Benefits from December 1995 to
April 2000, Assistant Vice President, Benefits Planning and Administration from
May 1995 to November 1995, and Director, Medical and Retirement Programs from
January 1995 to April 1995. Ms. Curle joined A.T. Massey in October 1993. Prior
to joining A.T. Massey, Ms. Curle served as an employee benefits consultant at
Foster Higgins, a national consulting firm (recently merged with William M.
Mercer, Inc.).
(1) A.T. Massey Coal Company, Inc., or A.T. Massey, is a wholly-owned
subsidiary of Massey Energy Company.
(2) Massey Coal Services, Inc. is a wholly-owned subsidiary of Massey Coal
Sales Company, Inc., a wholly-owned subsidiary of A.T. Massey.
(3) Rawl Sales & Processing Co. is a wholly-owned subsidiary of A.T. Massey.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's stock is listed on the New York Stock Exchange. The Company's
Common Stock trading symbol is MEE.
At December 31, 2001, there were 74,773,920 shares outstanding and
approximately 10,503 shareholders of record of Massey's common stock.
As discussed above, on November 30, 2000, Fluor completed the spin-off of
New Fluor, which is conducting all of the businesses previously conducted by
Fluor, other than the coal business. New Fluor is treated as the accounting
successor of Fluor. As a result, information regarding dividends previously paid
by, or prices paid for the common stock of, Fluor prior to November 30, 2000 is
not indicative of the past or future performance of Massey. The dividends paid
and the stock prices of Massey stock since November 30, 2000 is set forth below.
The dividends paid and the stock prices of Fluor stock prior to November 30,
2000 can be found in Fluor's Annual Report on Form 10-K for the fiscal year
ended October 31, 2000.
The following table sets forth the high and low sales prices per share of
Common Stock on the New York Stock Exchange, based upon published financial
sources, and the dividends declared on each share of Common Stock for the
quarter indicated.
High Low Dividends
---- --- ---------
Fiscal Year 2001
Quarter ended January 31, 2001 $ 18.10 $ 9.94 $ 0.08
Quarter ended April 30, 2001 $ 28.23 $ 17.20 $ 0.04
Quarter ended July 31, 2001 $ 22.95 $ 15.66 $ 0.04
Quarter ended October 31, 2001 $ 20.56 $ 12.25 $ 0.04
Due to the timing of the Spin-Off transaction, in December 2000, the
Company declared a first quarter dividend of $0.04 per share, payable in January
2001. Additionally, in January 2001, the Company declared a second quarter
dividend of $0.04 per share, payable in April 2001.
The Company's current dividend policy anticipates the payment of quarterly
dividends in the future. There are no restrictions, other than those set forth
under Delaware law, the Company's state of incorporation, on the Company's
ability to declare and pay dividends. The declaration and payment of dividends
to holders of Common Stock will be at the discretion of the Board of Directors
and will be dependent upon the future earnings, financial condition, and capital
requirements of the Company.
Transfer Agent and Registrar
Mellon Investor Services LLC acts as transfer agent and registrar for the
Massey Common Stock.
25
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA (1)
As described in the explanatory note immediately before Part I, the
Company has restated its previously issued financial statements for the years
ended October 31, 2001, 2000, and 1999. See Note 2 to consolidated financial
statements for further information regarding the restatement.
26
For the Year Ended October 31,
---------------------------------------------------------
2001 2000 1999 1998 1997
(Restated) (Restated) (Restated) (Restated) (Restated)
---------- ---------- ---------- ---------- ----------
(in millions, except per share, per ton and
number of employees amounts)
CONSOLIDATED STATEMENT OF EARNINGS DATA:
Produced coal revenue $ 1,203.3 $ 1,081.0 $ 1,076.1 $ 1,121.1 $ 1,077.9
Total revenue 1,431.9 1,312.7 1,263.0 1,292.4 1,229.4
Income from Operations 9.5 96.5 137.9 170.1 152.0
Net (Loss) Earnings (5.4) 78.5 102.5 128.3 117.2
(Loss) earnings per share (2)Basic and
diluted (0.07) 1.07 1.40 1.75 1.60
Dividends declared per share 0.20 N/A N/A N/A N/A
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $ (84.7) $ 164.8 $ 72.5 $ 33.7 $ 25.7
Total assets 2,271.1 2,183.8 2,008.6 1,866.6 1,669.7
Long-term debt 300.0 N/A N/A N/A N/A
Shareholders' equity 860.6 1,372.5 1,275.6 1,181.2 1,054.7
OTHER DATA:
EBIT $ 9.5 $ 96.5 $ 137.9 $ 170.1 $ 152.0
EBITDA (3) 190.8 267.8 305.5 320.6 283.3
Tons Sold 43.7 40.2 37.9 37.6 35.6
Tons Produced 45.1 41.5 38.4 38.0 36.6
Total costs and expenses per ton sold $ 32.52 $ 30.22 $ 29.71 $ 29.85 $ 30.26
Average cash cost per ton sold (4) 24.33 21.74 21.40 22.22 23.26
Produced coal revenue per ton sold 27.51 26.86 28.40 29.83 30.24
Capital expenditures $ 247.5 $ 204.8 $ 230.0 $ 307.9 $ 305.2
Number of employees 5,004 3,610 3,190 3,094 2,968
(1) On November 30, 2000, the Company completed a reverse spin-off (the
"Spin-Off"), which divided it into the spun-off corporation, "new" Fluor
Corporation ("New Fluor"), and Fluor, subsequently renamed Massey Energy
Company, which retained the Company's coal-related businesses. Further
discussion of the Spin-Off may be found in the Notes to the Consolidated
Financial Statements. As New Fluor is the accounting successor to Fluor
Corporation, Massey's equity structure was impacted as a result of the
Spin-Off. Massey retained $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. Therefore, the Selected
Financial Data for years prior to 2001 are not necessarily indicative of
the results of operations, financial position and cash flows of Massey in
the future or had it operated as a separate independent company during the
periods prior to November 30, 2000.
(2) Shares used to calculate basic earnings per share for the periods ended
October 31, 2000 and prior is based on the number of shares outstanding
immediately following the Spin-Off (73,468,707). Shares used to calculate
diluted earnings per share for the periods ended October 31, 2000 and prior
is based on the number of shares outstanding immediately following the
Spin-Off and the dilutive effect of stock options and other stock-based
instruments of Fluor Corporation, held by Massey employees, that were
converted to equivalent instruments in Massey Energy Company in connection
with the Spin-Off. 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 for the
period ended October 31, 2001 as such inclusion would result in
antidilution.
(3) EBITDA is defined as earnings before deducting net interest expense
(interest expense less interest income), income taxes and depreciation,
depletion and amortization. Although EBITDA is not a measure of performance
calculated in accordance with generally accepted accounting principles,
management believes that it is useful to an investor in evaluating Massey
because it is widely used in the coal industry as a measure to evaluate a
company's operating performance before debt expense and its cash flow.
EBITDA does not purport to represent cash generated by operating activities
and should not be considered in isolation or as a substitute for measures
of performance in accordance with generally accepted accounting principles.
In addition, because EBITDA is not calculated identically by all companies,
the presentation here may not be comparable to other similarly titled
measures of other companies. Management's discretionary use of funds
depicted by EBITDA may be limited by working capital, debt service and
capital expenditure requirements and by restrictions related to legal
requirements, commitments and uncertainties.
(4) Average cash cost per ton is calculated as the sum of Cost of produced coal
revenue and Selling, general and administrative expense (excluding
Depreciation, depletion and amortization), divided by the number of tons
sold. Although Average cash cost per ton is not a measure of performance
calculated in accordance with generally acceptable accounting principles,
management believes that it is useful to investors in evaluating Massey
because it is widely used in the coal industry as a measure to evaluate a
27
company's control over its cash costs. Average cash cost per ton should not
be considered in isolation or as a substitute for measures of performance
in accordance with generally accepted accounting principles. In addition,
because Average cash cost per ton is not calculated identically by all
companies, the presentation here may not be comparable to other similarly
titled measures of other companies. The table below reconciles the
generally acceptable accounting principal measure of Total costs and
expenses per ton to Average cash cost per ton.
------------------------------------------------------------------------------------------------------
For the year ended October 31,
------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ---------------- ---------------- --------------- ---------------
$ per ton $ per ton $ per ton $ per ton $ per ton
-------- ------- -------- ------- -------- ------- -------- ------ -------- ------
Total Costs
and Expenses $1,422.3 $32.52 $1,216.2 $30.22 $1,125.1 $29.71 $1,122.3 $29.85 $1,077.4 $30.26
------------------------------------------------------------------------------------------------------
Less: Freight
and handling
costs 129.9 $ 2.97 131.3 $3.26 106.2 $2.80 130.7 $3.48 108.5 $3.05
------------------------------------------------------------------------------------------------------
Less: Cost of
purchased coal
revenue 47.0 $ 1.08 38.9 $0.97 41.2 $1.09 5.5 $0.15 9.4 $0.26
------------------------------------------------------------------------------------------------------
Less:
Depletion,
Depreciation
and
Amortization 181.3 $4.14 171.3 $4.25 167.6 $4.42 150.5 $4.00 131.3 $3.69
------------------------------------------------------------------------------------------------------
Average Cash
Cost $1,064.1 $24.33 $874.7 $21.74 $ 810.1 $21.40 $835.6 $22.22 $828.2 $23.26
------------------------------------------------------------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company has recently resolved certain accounting and disclosure issues
resulting from a review by the Securities and Exchange Commission ("SEC") of its
Annual Report on Form 10-K for the fiscal year ended October 31, 2001. Certain
of the SEC comments addressed the timing of accounting recognition of certain
subsequent events previously recognized in the transition period ended December
31, 2001. Additionally, one comment addressed the methodology under which the
Company determined its black lung expense and underlying liability. In order to
resolve these comments, the Company agreed to amend its accounting policy
related to black lung effective November 1, 1994, and record adjustments for the
subsequent events. The Company has restated its financial statements for the
affected periods and has filed such restatements on this amended Form 10-K for
the year ended October 31, 2001. For further information, see Note 2 of the
Notes to Consolidated Financial Statements.
The affect of the restatement on total revenue, net income (loss), and
basic and diluted net income (loss) per share are as follows:
For the Years Ended
-------------------
October 31, 2001 October 31, 2000 October 31, 1999
---------------- ---------------- ----------------
(In millions, except per share amounts)
As Reported As Restated As Reported As Restated As Reported As Restated
----------- ----------- ----------- ----------- ----------- -----------
Total revenue $ 1,253.8 $ 1,431.9 $ 1,140.7 $ 1,312.7 $ 1,114.5 $ 1,263.0
Total costs and expenses 1,237.0 1,422.3 1,043.8 1,216.2 975.1 1,125.1
Net (loss) income (1.1) (5.4) 78.8 78.5 103.4 102.5
Net (loss) income per share
Basic $ (0.01) $ (0.07) $ 1.07 $ 1.07 $ 1.41 $ 1.40
Diluted (0.01) $ (0.07) 1.07 1.07 1.41 1.40
Results of Operations
2001 Compared with 2000
Produced coal revenue increased 11% to $1,203.3 million in 2001 as compared
to $1,081.0 million for the previous year. Two factors that impacted produced
coal revenue for 2001 compared to 2002 were:
o The volume of produced tons sold increased by 9 percent from 40.2
million tons in 2000 to 43.7 million tons in 2001. This increase
consisted of a 17 percent increase in utility tons sold and
a 19 percent increase in industrial tons sold, offset in part by a
decrease of 8 percent in metallurgical tons sold.
o The produced coal revenue per ton sold increased by 2 percent from
$26.86 in 2000 to $27.51 in 2001.
28
The market for utility coal continued to improve during the fiscal year
2001 as spot market prices of Central Appalachian coal increased to 20-year
highs. Unfortunately, most of the Massey tonnage sold in 2001 was committed
prior to the upturn in the market.
Freight and handling revenue decreased $1.4 million to $129.9 million in
2001 compared with $131.3 million in 2000.
Revenue from purchased coal sales increased 25 percent to $49.5 million in
2001 from $39.6 million in 2000, due to an increase in spot prices for coal, as
purchased tons sold were 1.3 million in 2001 and 2000. Massey purchases varying
amounts of coal each year to supplement produced coal.
Other revenue, which consists of royalties, rentals, miscellaneous income
and gains on the sale of non-strategic assets, decreased 19 percent to $49.2
million for 2001 compared with $60.8 million for 2000. The decrease 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 in
2001. As part of its management of coal reserves, Massey regularly sells
non-strategic reserves or exchanges them for reserves located in more
synergistic locations. In 2000, Massey sold certain non-strategic coal reserves
("Scarlet/Duncan Fork reserves") with a net book value of $1.9 million. Massey
received $32 million in consideration in the form of cash. A gain of $26.5
million was recognized in 2000, as $3.6 million was deferred due to a leaseback
option of a portion of the reserves sold. In 1999, Massey sold certain
non-strategic coal reserves ("Dials Branch reserves") with a net book value of
$1.8 million. Massey received consideration in the amount of $10.7 million. The
consideration was comprised of a note receivable in the amount of $11.0 million
for guaranteed deferred royalty payments through 2008, less $0.3 million of
assumed liabilities. The Dials Branch reserves sale resulted in a gain of $8.9
million being recognized in 1999. Massey recognized an additional $1.3 million
of gains in 1999 from several smaller asset sales.
Cost of produced coal revenue increased 23 percent to $1,032.4 million for 2001
from $839.4 million in 2000. This was partially due to the increase in tons
sold. Cost of produced coal revenue on a per ton sold basis increased by 14
percent for the fiscal year 2001 compared to fiscal 2000. This increase in cost
was related to both the direct cost of labor and the decreases in productivity
resulting from a greater percentage of inexperienced miners. This was due, in
part, to the Company's efforts to increase production. In addition, heavy rains
in southern West Virginia in July increased employee absenteeism and disrupted
loading operations and rail service, slowing coal shipping. Other operational
problems impacted production and costs throughout the fiscal year. Operating
difficulties and problematic geologic conditions were encountered at several
longwall mines and during the expansion of Massey's two large surface mines,
where we experienced higher than expected overburden ratios in the first half of
the year. 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.
Increases in operating costs related to the Martin County Coal slurry spill and
the idling of the Martin County Coal preparation plant from October 11, 2000, to
April 2, 2001, also negatively impacted cost of produced coal revenue.
Cost of produced coal revenue for 2001 and 2000 includes credits of $9.5
million and $15.0 million, respectively, related to refunds of black lung excise
taxes paid 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 2001, the Internal Revenue Service substantially completed its
audit of the Company's requested refund of black lung excise tax payments. Cost
of produced coal revenue for 2001 also includes pre-tax charges of $7.6 million
related to the write-off of longwall panel development costs at the Jerry Fork
longwall mine, $6.9 million related to the settlement with the State of West
Virginia regarding Worker's Compensation liabilities incurred by independent
contractors, and $2.5 million related to an increase in reserves for a wrongful
employee discharge suit. These costs in 2001 were partially offset by a $4.1
million benefit arising from the settlement of insurance claims from the August
2000 Upper Cedar Grove longwall failure.
Freight and handling costs decreased $1.4 million to $129.9 million in 2001
compared with $131.3 million in 2000.
Costs of purchased coal revenue increased 21 percent to $47.0 million in
2001 from $38.9 million in 2000. This was due to the increase in spot prices for
coal, as purchased tons sold were 1.3 million in 2001 and 2000. Massey purchases
varying amounts of coal each year to supplement produced coal.
Depreciation, depletion and amortization slightly increased to $181.3
million for 2001 from $171.3 million in 2000. The increase of $10 million was
primarily due to the level of capital expenditures in recent years.
Selling, general and administrative expenses decreased 10 percent to $31.7
million for 2001 compared with $35.4 million for 2000. This was due in part to a
$7.1 million bad debt expense in 2000 associated with the bankruptcy of a major
steel industry customer as well as a reduction in accruals related to long-term
executive compensation plans, partially offset by additions to the
administrative workforce associated with running a stand-alone publicly traded
company.
29
Interest income decreased to $8.7 million for 2001 compared to $25.7
million for 2000. This decrease was primarily due to the elimination of the
Company's loans with Fluor Corporation in connection with the Spin-Off
transaction on November 30, 2000. Additionally, 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 $34.2 million for 2001. The increase was due
to the addition of the 6.95 percent Senior Notes and commercial paper borrowings
subsequent to the Spin-Off.
Income tax benefit was $10.5 million for 2001 compared to an income tax
expense of $43.2 million for 2000. This primarily reflects the loss before taxes
for 2001 compared to income before taxes for 2000, as well as a depletion
accounting income tax benefit of $4.5 million in 2001.
2000 Compared with 1999
Produced coal revenue remained essentially unchanged in 2000 compared with
1999. Produced coal revenue were $1,081.0 million in 2000 compared with $1,076.1
million for 1999. Three factors that impacted produced coal revenue during 2000
were:
o The volume of produced steam coal sold increased by 14 percent in 2000
compared to 1999.
o The volume of higher priced metallurgical coal declined by 6 percent
in 2000 compared to 1999.
o The average realized prices for both steam and metallurgical coal
declined by 5 percent in 2000 compared with 1999.
The metallurgical coal market continued to be adversely affected by a weak
coal export market and the slow recovery of the domestic steel market. Demand
was weak for United States coal exported to foreign markets as the U.S. dollar
remained strong. The market for steam coal continued to be adversely impacted by
two factors: (1) mild weather and (2) competition from western coals, which
increased its penetration of traditional eastern coal market areas.
Freight and handling revenue increased $25.1 million to $131.3 million in
2000 compared with $106.2 million in 1999.
Revenue from purchased coal sales decreased $1.8 million to $39.6 million
in 2000 from $41.4 million in 1999, due to an decrease in spot prices for coal,
as purchased tons sold increased 0.3 million from were 1.0 million in 1999 to
1.3 million in 2000. Massey purchases varying amounts of coal each year to
supplement produced coal.
Other revenue, which consists of royalties, rentals, miscellaneous income
and gains on the sale of non-strategic assets, increased 54 percent to $60.8
million for 2000 compared with $39.3 million for 1999. The increase was
primarily due to an increase in income from dispositions of non-strategic
mineral reserves, which generated $26.5 million in 2000 compared with $10.2
million in 1999. As part of its management of coal reserves, Massey regularly
sells non-strategic reserves or exchanges them for reserves located in more
synergistic locations.
Cost of produced coal revenue increased 8 percent to $839.4 million for
2000 from $777.4 million in 1999. This was primarily due to the increase in tons
sold by 6 percent from 37.9 million tons in 1999 to 40.2 million tons in 2000.
Cost of produced coal revenue for 2000 includes a $15.0 million credit related
to refunds of black lung excise taxes paid on coal export sales tonnage. The
payment of black lung excise taxes on exported coal was determined to be
unconstitutional by a 1998 federal district court decision. During 2000, the
Internal Revenue Service issued procedures for obtaining refunds related to such
excise taxes. Cost of produced coal revenue also included charges of $9 million
related to a geological impairment related to the longwall development at the
Upper Cedar Grove mine and a $3 million charge related to a slurry spill from
the impoundment breach at Martin County Coal Corporation. Cost of produced coal
revenue on a per ton of coal sold basis, excluding the aforementioned items,
increased by approximately 2 percent in 2000 compared with 1999 as operational
problems and adverse geologic conditions encountered during the third and fourth
quarters of 2000 more than offset cost reductions that had been achieved in the
first two quarters of 2000.
Freight and handling costs increased $25.1 million to $131.3 million in
2000 compared with $106.2 million in 1999.
Costs of purchased coal revenue decreased $2.3 million to $38.9 million in
2000 from $41.2 million in 1999. This was due to the decrease in spot prices for
coal, as purchased tons sold increased 0.3 million from were 1.0 million in 1999
to 1.3 million in 2000. Massey purchases varying amounts of coal each year to
supplement produced coal.
30
Depreciation, depletion and amortization slightly increased to $171.3
million for 2000 from $167.6 million in 1999. The increase of $3.7 million was
primarily due to capital expenditures made in recent years.
Selling, general and administrative expenses increased 8 percent to $35.4
million for 2000 compared with $32.7 million for 1999, due in part to a $5.8
million bad debt expense associated with the bankruptcy of a major steel
industry customer offset some by a reduction in accruals related to long-term
executive compensation plans.
Interest income increased to $25.7 million for 2000 compared with $14.4
million for 1999. This increase of $11.3 million was primarily due to the
additional interest income of $5.3 million related to the black lung excise tax
refunds discussed above and a general increase in the floating interest rate on
a note receivable from Fluor Corporation.
Income taxes decreased 12 percent to $43.2 million for 2000 compared with
$49.0 million in 1999. The decrease primarily reflects the decreased earnings in
2000 compared with 1999, partially offset by a rise in the effective tax rate to
35.5 percent for 2000 compared with 32.3 percent for 1999.
Liquidity and Capital Resources
At October 31, 2001, the Company's available liquidity was $147.5 million,
including cash and cash equivalents of $5.7 million and $141.8 million remaining
on the Company's commercial paper program. At October 31, 2001, Massey had
$240.4 million of consolidated commercial paper (outstanding commercial paper of
$257.9 million net of discount offset by $17.5 million of Massey commercial
paper purchased by various Massey subsidiaries) included in short-term debt. In
order to participate in the commercial paper market, the Company must maintain
an investment grade rating as determined by both Moody's and Standard & Poor's,
national rating agencies. Failure to maintain this rating would most likely
result in increased interest expense, as the Company would be required to draw
on its available liquidity backstop. On the date of the Spin-Off, Massey entered
into $150 million 364-day and $250 million 3-year revolving credit facilities,
which have been guaranteed by A. T. Massey, that serve to provide liquidity
backstop to Massey's commercial paper program and are also available to meet the
Company's ongoing liquidity needs. The $150 million 364-day facility has been
renewed through November 26, 2002. Borrowings under these facilities bear
interest based on (i) the London Interbank Offer Rate (LIBOR) plus a margin,
which is based on the Company's credit rating as determined by Moody's and
Standard & Poor's, (ii) the Base Rate (as defined in the facility agreements),
and (iii) the Competitive Bid rate (as defined in the facility agreements).
There were no borrowings outstanding under the credit facilities at October 31,
2001.
The revolving credit facilities contain financial covenants requiring the
Company to maintain various financial ratios. Failure by the Company 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 the Company. 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 the
Company 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 the Company not permit the ratio of
the Company's adjusted EBITDA to interest expense for the four quarters then
ended to be less than a specified amount. The net worth test requires that the
Company not permit its net worth to be less than a specified amount. The Company
was in compliance with all material covenants at October 31, 2001. Except for
the covenant related to the leverage ratio, the Company was in compliance with
all material covenants at December 31, 2001. The covenant related to leverage
ratio requires the Company to maintain a ratio of Consolidated Debt to
Consolidated EBITDA of not more than 3.0 to 1.0, however, the participant banks
have granted a temporary waiver of this financial covenant. The waiver expires
on February 22, 2002. The Company is seeking to obtain an amendment to the
covenant level prior to the expiration of the waiver and expects approval by the
participant banks. If the Company is unable to obtain an amendment to the
covenant level, it would most likely result in the Company seeking alternate
sources of short-term financing, or issuing longer term debt. The Company
has available a $500 million debt shelf registration originally filed with the
Securities and Exchange Commission by Fluor Corporation in March 1999, all of
which remains unused.
The total debt-to-book capitalization ratio was 38.8 percent at October 31,
2001. The cash flow provided by operating activities was $202.6 million in 2001
and $154.3 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 in investing activities was
$242.4 million in 2001, and $173.4 million in 2000. The cash used in investing
activities reflects capital expenditures in the amount of $247.5 million and
$204.8 million for the years ended October 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 other capital accounts associated with the Spin-Off
transaction and being a publicly traded company. In addition to the cash spent
on capital expenditures during the year of 2001, the Company leased, through
operating leases, $109.0 million and $69.0 million of mining equipment in 2001
and 2000, respectively.
31
Massey believes that cash generated from operations and its borrowing
capacity will be sufficient to meet its working capital requirements,
anticipated capital expenditures (other than major acquisitions), scheduled debt
payments and anticipated dividend payments for at least the next several years.
Nevertheless, the ability of Massey to satisfy its debt service obligations, to
fund planned capital expenditures or pay dividends will depend upon its future
operating performance, which will be affected by prevailing economic conditions
in the coal industry and financial, business and other factors, some of which
are beyond Massey's control. Massey frequently evaluates potential acquisitions.
In the past, Massey has funded acquisitions primarily with cash generated from
operations, but Massey may consider a variety of other sources, depending on the
size of any transaction, including debt or equity financing. There can be no
assurance that such additional capital resources will be available to Massey on
terms which Massey finds acceptable, or at all.
Inflation
Inflation in the United States has been relatively low in recent years and
did not have a material impact on Massey's results of operations for the years
presented.
New Accounting Standards
Effective November 1, 2000, the Company adopted Statement of Financial
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 Statements require that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
adoption of these accounting standards and subsequent implementation guidance
did not have a significant impact on the Company's financial statements. As part
of ongoing accounting operations, management will continue to assess its
financial instruments and activities for identification of transactions subject
to the treatment of SFAS 133 and all related guidance.
On August 15, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"). The standard requires the fair
value of a liability for an asset retirement obligation to be recognized in the
period in which it is incurred. When the liability is initially recorded, the
offset is capitalized by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. To settle the liability, the obligation is paid, and to the
extent there is a difference between the liability and the amount of cash paid,
a gain or loss upon settlement is incurred. This standard is effective for
fiscal years beginning after June 15, 2002 and transition is by cumulative
catch-up adjustment. The Company will adopt SFAS No. 143 on January 1, 2003 and
the adoption will change the Company's current accounting for reclamation. Due
to the significant number of mines that the Company operates and the extensive
amount of information that must be reviewed and estimates that must be made to
assess the effects of the standard, the impact of adoption of SFAS No. 143 on
the Company's financial position or results of operations has not yet been
determined.
Outlook
Massey expects a loss in the two-month stub period between October 31, 2001
fiscal year end and the January 1, 2002 beginning of its first calendar fiscal
year due to a number of operational and non-operational issues. Mild weather,
softening steel demand and the general economic recession have also caused
Massey to lower its earlier estimate of 2002 Central Appalachian coal demand.
Notwithstanding, production and profitability are expected to improve
significantly over fiscal year 2001.
Item 7A. 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 October 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 October 31, 2001, Massey had
$258.2 million of aggregate principal amount of commercial paper outstanding
($257.9 million net of discount). At October 31, 2001 Massey's commercial paper
bore interest at an average rate of 3.03 percent. Based on the commercial paper
balance outstanding at October 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 $2.6 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.
32
Part II
Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of Massey Energy Company
We have audited the accompanying consolidated balance sheets of Massey Energy
Company as of October 31, 2001 and 2000, and the related consolidated statements
of earnings, cash flows, and shareholders' equity for each of the
three years in the period ended October 31, 2001. Our audit also included the
financial statement schedule listed in Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Massey Energy
Company, as restated at October 31, 2001 and 2000, and the consolidated results
of its operations and its cash flows, as restated for each of the three years in
the period ended October 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company
has restated its 2001, 2000, and 1999 financial statements.
/s/ Ernst & Young LLP
Richmond, Virginia
January 25, 2002
except for, Note 2, the caption entitled "property, plant, and equipment"
(last paragraph) in Note 3, Note 4, Note 7, Note 8, Note 10, Note 15, and all
information marked "restated" in the notes to consolidated financial
statements, as to which the date is March 26, 2003
33
MASSEY ENERGY COMPANY
CONSOLIDATED STATEMENTS OF EARNINGS
(In Thousands, Except Per Share Amounts)
Year Ended October 31,
----------------------------------------------------------
2001 2000 1999
(Restated) (Restated) (Restated)
------------------ ------------------ ------------------
Revenues
Produced coal revenue $ 1,203,285 $ 1,081,027 $ 1,076,059
Freight and handling revenue 129,894 131,334 106,250
Purchased coal revenue 49,485 39,585 41,389
Other revenue 49,197 60,752 39,338
------------------ ------------------ ------------------
Total revenues 1,431,861 1,312,698 1,263,036
------------------ ------------------ ------------------
Costs and expenses
Cost of produced coal revenue 1,032,420 839,359 777,411
Freight and handling costs 129,894 131,334 106,250
Cost of purchased coal revenue 47,030 38,853 41,212
Depreciation, depletion and
Amortization applicable to:
Cost of produced coal revenue 177,384 169,467 165,756
Selling, general and
administrative 3,885 1,869 1,802
Selling, general and administrative 31,702 35,364 32,696
------------------ ------------------ ------------------
Total costs and expenses 1,422,315 1,216,246 1,125,127
------------------ ------------------ ------------------
Income from operations 9,546 96,452 137,909
Interest income 8,747 25,661 14,426
Interest expense (34,214) (347) (803)
------------------ ------------------ ------------------
(Loss) Earnings before taxes (15,921) 121,766 151,532
Income tax (benefit) expense (10,501) 43,235 48,989
------------------ ------------------ ------------------
Net (loss) earnings $ (5,420) $ 78,531 $ 102,543
================== ================== ==================
(Loss) Earnings per share
Basic $ (0.07) $ 1.07 $ 1.40
================== ================== ==================
Diluted $ (0.07) $ 1.07 $ 1.40
================== ================== ==================
Shares used to calculate (loss) earnings per
share
Basic 73,858 73,469 73,469
================== ================== ==================
Diluted 73,858 73,472 73,476
================== ================== ==================
See Notes to Consolidated Financial Statements.
34
MASSEY ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars)
At October 31,
--------------------------------------
2001 2000
(Restated) (Restated)
------------------ ------------------
ASSETS
Current Assets
Cash and cash equivalents $ 5,664 $ 6,929
Trade and other accounts receivable net of allowance
of 9,848 and 12,899 198,885 215,574
Inventories 141,483 104,132
Deferred taxes 13,572 8,398
Income taxes receivable 1,880 --
Prepaid expenses and other 96,034 97,594
------------------ ------------------
Total current assets 457,518 432,627
Net Property, Plant and Equipment 1,613,133 1,559,426
Other Noncurrent Assets
Pension assets 80,400 67,740
Other 120,029 124,018
------------------ ------------------
Total other noncurrent assets 200,429 191,758
------------------ ------------------
Total assets $ 2,271,080 $ 2,183,811
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, principally trade and bank overdrafts $ 185,903 $ 153,457
Short-term debt 248,231 --
Payroll and employee benefits 37,878 30,784
Income taxes payable -- 5,122
Other current liabilities 70,223 78,420
------------------ ------------------
Total current liabilities 542,235 267,783
Noncurrent Liabilities
Long-term debt 300,000 --
Deferred taxes 250,444 252,657
Other 317,796 290,891
------------------ ------------------
Total noncurrent liabilities 868,240 543,548
Shareholders' Equity
Capital Stock
Preferred stock - authorized 20,000,000 shares; no par;
none issued -- --
Common stock - authorized 150,000,000 shares; $0.625 par;
issued and outstanding - 74,543,670 and 73,468,707
shares, respectively 46,590 45,918
Additional Capital 15,541 --
Retained earnings 805,180 --
Unamortized executive stock plan expense (6,706) --
Accumulated other comprehensive income -- --
Unrealized loss on investments -- (763)
Net investment by Fluor Corporation -- 1,606,389
Due from Fluor Corporation -- (279,064)
------------------ ------------------
Total shareholders' equity 860,605 1,372,480
------------------ ------------------
Total liabilities and shareholders' equity $ 2,271,080 $ 2,183,811
================== ==================
See Notes to Consolidated Financial Statements.
35
MASSEY ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Year Ended October 31,
----------------------------------------------------------
2001 2000 1999
(Restated) (Restated) (Restated)
------------------ ------------------ -----------------
Cash Flows From Operating Activities
Net (loss) earnings $ (5,420) $ 78,531 $ 102,543
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation, depletion and amortization 181,269 171,336 167,558
Deferred taxes (4,260) 28,053 41,837
Loss (gain) on disposal of assets 517 (28,169) (10,104)
Changes in operating assets and
liabilities
Decrease (increase) in accounts
receivable 4,603 (42,801) (6,653)
Increase in inventories (40,350) (12,349) (20,089)
Increase in prepaid expenses and other
current assets (25,461) (13,983) (7,578)
Decrease (Increase) in pension and other
assets 25,237 (30,013) (36,733)
Increase (decrease) in accounts payable
and bank overdrafts 32,446 (6,729) 19,850
(Decrease) increase in accrued income
taxes (7,002) 2,197 (11,340)
Decrease in other accrued liabilities (2,004) (5,204) (10,007)
Increase in other non-current liabilities 13,217 12,818 6,440
------------------ ------------------ -----------------
Cash provided by operating activities 172,792 153,687 235,724
------------------ ------------------ -----------------
Cash Flows From Investing Activities
Capital expenditures (247,517) (204,835) (230,001)
Proceeds from sale of assets 34,870 32,072 7,197
------------------ ------------------ -----------------
Cash utilized by investing activities (212,647) (172,763) (222,804)
------------------ ------------------ -----------------
Cash Flows From Financing Activities
Decrease in short-term debt, net (29,998) -- --
Decrease (increase) in amount due from
Fluor Corporation 67,554 1,352 (15,012)
Equity contributions from Fluor
Corporation 2,476 17,069 7,739
Cash dividends paid (11,811) -- --
Stock options exercised 9,369 -- --
Other, net 1,000 (467) (1,247)
------------------ ------------------ -----------------
Cash provided (utilized) by
financing activities 38,590 17,954 (8,520)
------------------ ------------------ -----------------
(Decrease) increase in cash and cash
equivalents (1,265) (1,122 4,400
Cash and cash equivalents at beginning of
period 6,929 8,051 3,651
------------------ ------------------ -----------------
Cash and cash equivalents at end of period $ 5,664 $ 6,929 $ 8,051
================== ================== ==================
Supplemental disclosure of cash flow
information
Cash paid during the fiscal year for
income taxes $ 1,656 $ 12,834 $ 18,492
================== ================== ==================
See Notes to Consolidated Financial Statements.
36
MASSEY ENERGY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands)
Common Stock
---------------------- Net
Unamortized Investment
Executive by Fluor Due From
Shares Amount Additional Stock Plan Corporation Fluor
(Restated) (Restated) Capital Expense (Restated) Corporation
--------------------------------------------------------------------------------
Balance at October 31, 1998 73,469 $ 45,918 $ -- $ -- $ 1,400,507 $ (265,404)
----------- ------------ ----------- ------------- ------------ -------------
Net income 102,543
Other comprehensive income (loss), net of
deferred tax benefit of $568:
Unrealized loss on investment
Reclassification of unrealized gain
to net income
Comprehensive income
Capital contributions 7,739
Net change in amount due from Fluor (15,012)
Corporation
---------------------------------------------------------------------------------
Balance at October 31, 1999 73,469 $ 45,918 $ -- $ -- $ 1,510,789 $ (280,416)
---------------------------------------------------------------------------------
Net income 78,531
Other comprehensive income (loss), net of
deferred tax benefit of $30:
Unrealized gain on investment
Reclassification of unrealized gain
to net income
Comprehensive loss
Capital contributions 17,069
Net change in amount due from Fluor 1,352
Corporation
---------------------------------------------------------------------------------
Balance at October 31, 2000 73,469 $ 45,918 $ -- $ -- $ 1,606,389 $ (279,064)
---------------------------------------------------------------------------------
Net loss
Other comprehensive income (loss), net of
deferred taxes of $488:
Reclassification of unrealized loss
to net income
Comprehensive loss
Capital contributions 2,476
Net change in amount due from Fluor 67,554
Corporation
Spin-Off transaction (3,840) (1,608,865) 211,510
Dividends declared ($0.20 per share)
Exercise of stock options, net 817 511 8,858
Stock option tax benefit 2,611
Amortization of executive stock plan 1,367
expense
Issuance of restricted stock, net 258 161 4,072 (4,233)
---------------------------------------------------------------------------------
Balance at October 31, 2001 75,544 $ 46,590 $ 15,541 $ (6,706)$ -- $ --
=================================================================================
Accumulated
Other
Comprehensive Total
Retained Income Shareholders'
Earnings (Loss) Equity
(Restated) (Restated) (Restated)
-------------------------------------------
Balance at October 31, 1998 $ -- $ 173 $ 1,181,194
------------ -------------- --------------
Net income 102,543
Other comprehensive income (loss), net of
deferred tax benefit of $568:
Unrealized loss on investment (205) (205)
Reclassification of unrealized gain
to net income (684) (684)
-------------
Comprehensive income 101,654
-------------
Capital contributions 7,739
Net change in amount due from Fluor (15,012)
Corporation
------------------------------------------
Balance at October 31, 1999 $ -- $ (716)$ 1,275,575
------------------------------------------
Net income 78,531
Other comprehensive income (loss), net of
deferred tax benefit of $30:
Unrealized gain on investment 1,075 1,075
Reclassification of unrealized gain (1,122) (1,122)
to net income
-------------
Comprehensive loss 78,484
-------------
Capital contributions 17,069
Net change in amount due from Fluor 1,352
Corporation
------------------------------------------
Balance at October 31, 2000 $ -- $ (763)$ 1,372,480
------------------------------------------
Net loss (5,420) (5,420)
Other comprehensive income (loss), net of
deferred taxes of $488:
Reclassification of unrealized loss 763 763
to net income
-------------
Comprehensive loss (4,657)
-------------
Capital contributions 2,476
Net change in amount due from Fluor 67,554
Corporation
Spin-Off transaction 825,373 (575,822)
Dividends declared ($0.20 per share) (14,773) (14,773)
Exercise of stock options, net 9,369
Stock option tax benefit 2,611
Amortization of executive stock plan 1,367
expense
Issuance of restricted stock, net --
------------------------------------------
Balance at October 31, 2001 $ 805,180 $ -- $ 860,605
==========================================
See Notes to Consolidated Financial Statements.
37
MASSEY ENERGY COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Massey Energy Company ("Massey" or the "Company"), its wholly owned subsidiary
A. T. Massey Coal Company, Inc. ("A. T. Massey") and its subsidiaries. A. T.
Massey now represents the sole operating subsidiary of Massey, as Massey has no
separate independent operations. Until the spin-off transaction on November 30,
2000 (the "Spin-Off") (See Note 11), A. T. Massey was 100% controlled by Fluor
Corporation ("Fluor"). Therefore, these financial statements for all periods
prior to 2001 may not necessarily be indicative of the results of operations,
financial position and cash flows of Massey in the future or had it operated as
a separate independent company. All significant intercompany transactions and
accounts have been eliminated.
2. Restatement and Reclassification
The Company has recently resolved certain accounting and disclosure issues
resulting from a review by the Securities and Exchange Commission (SEC) of its
annual report on Form 10-K for the fiscal year ended October 31, 2001. The
issues, which are explained more fully below involve corrections to (1) the
timing of recognition of certain charges related to claims against the Company,
(2) its presentation of shareholders' equity and adjustments related to the
Spin-Off and (3) its accounting method for black lung liabilities and related
expense recognition. The Company has restated its 2001 and prior year financial
statements to reflect charges related to claims against the Company in the
proper periods, properly present shareholders' equity in periods prior to the
Spin-Off and to account for black lung obligations under the service period
approach as described in Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions (SFAS No.
106)
The restatement adjustments are as follows:
The consolidated financial statements for 2001 are restated to recognize a
fourth quarter $6.9 million charge related to the settlement of claims for
delinquent workers' compensation premiums which was previously recognized in the
two-month transition period ended December 31, 2001. As a result, at October 31,
2001, Other Current liabilities increased by $2.4 million and Other Non-Current
Liabilities increased by $4.5 million.
The consolidated financial statements for 2001 are restated to recognize a
fourth quarter $2.5 million charge in connection with a wrongful employee
discharge lawsuit which was previously recognized in the transition period ended
December 31, 2001. As a result, at October 31, 2001, Other Non-Current
Liabilities increased by $2.5 million.
The Consolidated Financial Statements are restated to present assumed
shares outstanding for all periods presented. As a result, at October 31, 2000
and 1999, there was an increase of $45.9 million in Common Stock and a decrease
of $45.9 million in Net Investment by Fluor Corporation to reflect 73.5 million
shares of common stock outstanding (the number of shares outstanding on the date
of the Spin-off).
The consolidated financial statements have also been restated to
retroactively adopt and apply the service period approach described in SFAS No.
106 as allowed under SFAS No. 112 Employers' Accounting for Postemployment
Benefits to the Company's obligations with respect to coal worker's
pneumoconiosis (black lung). Previously, the Company utilized a different
actuarial approach. This change has been implemented effective November 1, 1994,
the first date under which the Company was required to implement SFAS No. 112.
Trust assets previously offset against the Company's black lung liability have
been reclassified to other current assets and accounted for under SFAS No. 115
Accounting for Certain Investments in Debt and Equity Securities.
The restatement (change in black lung expense net of realized gains on
reclassified trust assets) changed net income in each year presented as follows:
decrease of $0.9 million in fiscal 1999, decrease of $0.3 million in fiscal
2000, and an increase of $1.4 million in fiscal 2001. The restatement of black
lung expense and the related liability had no net impact on the Shareholders'
Equity at October 31, 2001 as adjustments to income and expense amounts offset.
Balance sheet changes as of October 31, 2001 related to the restatement were an
increase in Other Non-Current Liabilities of $2.4 million, and an increase in
Prepaid Expenses and Other Current Assets of $2.4 million. At October 31, 2000,
Other Non-Current Liabilities increased by $33.3 million and Prepaid Expenses
and Other Current Assets increased by $29.8 million.
The Company has also reclassified all periods presented to present Freight
and Handling Revenue and Costs and Purchased Coal Revenue and Costs on a gross
rather than net basis. Previously, these items were presented "net" in other
income. The net amount included in other income was $2.5 million in 2001, $0.7
million in 2000, and $0.2 million in 1999. These changes have been made to
conform to the requirements of Emerging Issues Task Force (EITF) Issue No. 00-10
"Accounting for Shipping and Handling Fees and Costs" and EITF Issue No. 99-19
"Reporting Revenue Gross as a Principal versus Net as an Agent".
Set forth below is a comparison of the previously reported and restated
consolidated net income and per share amounts for the years ended October 31,
2001, 2000, and 1999.
October 31, 2001 October 31, 2000 October 31, 1999
---------------- ---------------- ----------------
(In millions, except per share amounts)
As Reported As Restated As Reported As Restated As Reported As Restated
----------- ----------- ----------- ----------- ----------- -----------
Net (loss) earnings $ (1.1) $ (5.4) $ 78.8 $ 78.5 $ 103.4 $ 102.5
(Loss) Earnings per share
Basic $ (0.01) $ (0.07) $ 1.07 $ 1.07 $ 1.41 $ 1.40
Diluted (0.01) (0.07) 1.07 1.07 1.41 1.40
Shares used to calculate
(loss) earnings per share
Basic 73,858 73,858 73,469 73,469 73,469 73,469
Diluted 73,858 73,858 73,472 73,472 73,476 73,476
3. Significant Accounting Policies
Use of Estimates
The preparation of the financial statements of the Company in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect reported amounts. These
estimates are based on information available as of the date of the financial
statements. Therefore, actual results could differ from those estimates.
Cash and Cash Equivalents
Securities with maturities of 90 days or less at the date of purchase are
classified as cash equivalents.
Revenue Recognition
Coal sales are generally recognized when title passes to the customers. For
domestic sales, this generally occurs when coal is loaded at the mine or at
off-site storage locations. For export sales, this generally occurs when coal is
loaded onto marine vessels at terminal locations. In certain instances, the
Company maintains ownership of the coal inventory on customers' sites and sells
tonnage to such customers as it is consumed. For these customers, revenue is
recognized when title and risk of loss passes to the customers at the point of
consumption.
38
Other revenue generally consists of royalties, rentals, miscellaneous
income and gains on the sale of non-strategic assets. For the years ended
October 31, 2001, 2000, and 1999, the Company recorded gains on the sale of
non-strategic reserves of $1.1 million, $26.5 million, and $10.2 million,
respectively.
Freight and Handling Revenue and Costs
Freight and handling costs paid to third-party carriers and invoiced to
coal customers are recorded as Freight and handling costs and Freight and
handling revenue, respectively.
Purchased Coal Revenue and Costs
Purchased coal revenue represents revenue recognized from the sale of coal
purchased from external production sources. In these instances, the Company
takes title to the coal that is purchased from external production sources,
which is then sold to the Company's customer.
Property, Plant and Equipment
Property, plant and equipment is carried at cost and comprises:
At October 31,
--------------------------------------------
2001 2000
-------------------- ---------------------
(in thousands)
Land, buildings and equipment $ 1,652,017 $ 1,561,122
Mining properties and mineral rights 596,280 582,512
Mine development 466,777 373,418
-------------------- ---------------------
Total property, plant and equipment 2,715,074 2,517,052
Less accumulated depreciation, depletion and amortization (1,101,941) (957,626)
-------------------- ---------------------
Net property, plant and equipment $ 1,613,133 $ 1,559,426
==================== =====================
Expenditures that extend the useful lives of existing buildings and
equipment are capitalized. Maintenance, repairs and minor renewals are expensed
as incurred. Coal exploration costs are expensed as incurred. Development costs
applicable to the opening of new coal mines and certain mine expansion projects
are capitalized. When properties are retired or otherwise disposed, the related
cost and accumulated depreciation are removed from the respective accounts and
any profit or loss on disposition is credited or charged to income.
Depreciation of buildings, plant and equipment is calculated on the
straight-line method over their estimated useful lives, which generally range
from 15 to 30 years for building and plant, and 3 to 20 years for equipment.
Depletion of mining properties and mineral rights and amortization of mine
development costs are computed using the units-of-production method over the
estimated recoverable tons. Approximately $52.1 million of costs associated with
mining properties and mineral rights is not currently subject to amortization as
mining has not begun or production has been temporarily idled on the associated
coal reserves.
Reclamation
The Federal Surface Mining Control and Reclamation Act establishes
operational, reclamation and closure standards for all aspects of surface mining
as well as most aspects of deep mining. Estimates of our total reclamation and
mine-closing liabilities are based upon permit requirements and our engineering
expertise related to these requirements. For each permit, the cost of final mine
closure, including the cost of treating mine water discharge, is accrued as coal
is mined, on a unit-of-production basis over the estimated proven and probable
reserves as defined in Industry Guide 7. The Company's reclamation cost
estimates are regularly reviewed by the Company's management and engineers and
are revised for changes in future estimated costs and regulatory requirements.
Additionally, the Company performs a certain amount of required reclamation of
disturbed acreage as an integral part of its normal mining process. These costs
are expensed as incurred.
39
Impairment of Long-Lived Assets
Impairment of long-lived assets is recorded when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying value. The carrying value of the
assets is then reduced to their estimated fair value which is usually measured
based on an estimate of future discounted cash flows.
During the third quarter of 2001, management decided to move a longwall to
better mining conditions in another mining location. As a result, unamortized
longwall panel development costs of $7.6 million were considered to be impaired
and were written off. These charges are included in cost of produced coal
revenue. During the fourth quarter of 2000, due to poor and unsafe mining
conditions, the Company abandoned certain longwall mining equipment and related
longwall panel development costs. This resulted in a write-off of approximately
$9 million, which is included in cost of produced coal revenue.
Advance Mining Royalties
Leases which require minimum annual or advance payments and are recoverable
from future production are generally deferred and charged to expense as the coal
is subsequently produced. At October 31, 2001 and 2000, advance mining royalties
included in other noncurrent assets totaled $29.8 and $27.5 million,
respectively.
Income Taxes
Deferred income taxes result from temporary differences between the tax
bases of assets and liabilities and their financial reporting amounts.
Shareholders' Equity
The Statement of Shareholders' Equity for periods prior to the Spin-Off
(see Note 11) reflects the outstanding shares of Massey Energy Company
immediately following the Spin-Off. The Company believes this presentation to be
preferable to reporting earnings per share utilizing the distribution ratio at
the time of the Spin-Off and the capital structure of the combined Fluor
Corporation entity prior to the Spin-Off. Please refer to the "Earnings per
Share" section below for further discussion of the impact of this presentation
on earnings per share.
Earnings per Share
Shares used to calculate basic earnings per share for the periods ended
October 31, 2000 and 1999 are the number of shares outstanding immediately
following the Spin-Off (see Note 11). The calculation of historical earnings per
share for the periods reported prior to the Spin-Off does not use a pro rata
portion of the shares previously reported by Fluor Corporation prior to the
Spin-Off. We have assumed no relation to Fluor's previously existing capital
structure in calculating earnings per share for these periods. This is
considered preferable as the operations that comprise Massey Energy had no
separate capital structure prior to the Spin-Off and New Fluor was treated for
reporting purposes as the accounting successor to Fluor (see Note 9). A pro rata
portion of Fluor's historic shares would not have been a good representation of
Massey Energy's capital structure as Fluor had share transactions that were
unrelated to the operations that became Massey Energy. The most significant such
share transaction was the maturity and settlement by Fluor of a forward purchase
contract on November 30, 2000 for 1,850,000 shares of Fluor Corporation common
stock.
The number of shares used to calculate basic loss per share for the period
ended October 31, 2001 is based on the number of weighted average outstanding
shares of Massey Energy during the period. Shares used to calculate diluted
earnings per share for the periods ended October 31, 2000 and 1999 is based on
the number of shares outstanding immediately following the Spin-Off and the
dilutive effect of stock options and other stock-based instruments of Fluor
Corporation, held by Massey employees, that were converted to equivalent
instruments in Massey Energy Company in connection with the Spin-Off. 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 for the period ended October 31, 2001 as such
inclusion would result in antidilution.
40
The computations for basic and diluted (loss) earnings per share are based
on the following per share information:
At October 31,
-------------------------------------------------------
2001 2000 1999
----------------- ----------------- -----------------
(in thousands)
Weighted average shares of common stock outstanding:
Basic 73,858 73,469 73,469
Effect of stock options/restricted stock -- 3 7
----------------- ----------------- -----------------
Diluted 73,858 73,472 73,476
================= ================= =================
Inventories
Purchased coal inventories are stated at the lower of cost, computed on the
first-in, first-out method, or market value. Produced coal and supplies
generally are stated at the lower of average cost or net realizable value.
Inventories are comprised of the following:
At October 31,
--------------------------------------------
2001 2000
----------------- -----------------
(in thousands)
Coal $ 117,915 $ 82,636
Other 23,568 21,496
----------------- -----------------
$ 141,483 $ 104,132
================= =================
Longwall Panel Costs
The Company defers certain costs related to the development of longwall
panels within a deep mine. These costs are amortized over the life of the panel
once it is placed in service. Longwall panel lives range from approximately
eight to twelve months. At October 31, 2001 and 2000, deferred longwall panel
costs included in other current assets totaled $52.0 million and $24.6 million,
respectively.
Internal Use Software
The Company capitalizes certain costs incurred in the development of
internal-use software, including external direct material and service costs, and
employee payroll and payroll-related costs in accordance with the American
Institute of Certified Public Accountants' Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use." All costs capitalized are amortized using the straight-line
method over the estimated useful life not to exceed 7 years.
Concentrations of Credit Risk and Major Customers
The Company is engaged in the production of high-quality low sulfur steam
coal for the electric generating industry, as well as industrial customers and
metallurgical coal for the steel industry. Steam coal sales accounted for
approximately 54%, 50%, and 46% of produced coal revenue during 2001, 2000, and
1999, respectively. Metallurgical coal sales accounted for approximately 34%,
40%, and 45% of produced coal revenue during 2001, 2000, and 1999, respectively.
Industrial coal sales during 2001, 2000, and 1999 were 12%, 10%, and 9% of
produced coal revenue, respectively.
Massey's mining operations are conducted in eastern Kentucky, West Virginia
and Virginia and the coal is marketed primarily in the United States.
For the years ended October 31, 2001, 2000, and 1999, approximately 11%,
14%,and 12%, respectively, of produced coal revenue were made to one utility
customer. At October 31, 2001, approximately 25%, 63% and 12% of consolidated
trade receivables represent amounts due from metallurgical customers, utility
customers and industrial customers, respectively, compared with 51%, 40% and 9%,
respectively, as of October 31, 2000. Credit is extended based on an evaluation
of the customer's financial condition and generally collateral is not required.
41
Derivatives
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 Statements require that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
adoption of these accounting standards and subsequent implementation guidance
did not have a significant impact on the Company's financial position, results
of operations, or liquidity.
Stock Plans
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost for stock options granted to employees is
measured as the excess, if any, of the quoted market price of the stock at the
date of grant over the amount an employee must pay to acquire the stock.
Compensation cost for stock appreciation rights and performance equity units is
recorded based on the quoted market price of the Company's stock at the end of
the period.
Accounting Pronouncements
On August 15, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS No. 143"). The standard requires the fair value
of a liability for an asset retirement obligation to be recognized in the period
in which it is incurred. When the liability is initially recorded, the offset is
capitalized by increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. To
settle the liability, the obligation is paid, and to the extent there is a
difference between the liability and the amount of cash paid, a gain or loss
upon settlement is incurred. This standard is effective for fiscal years
beginning after June 15, 2002, and transition is by cumulative catch-up
adjustment. The Company will adopt SFAS 143 on January 1, 2003 and the adoption
will change the Company's current accounting for reclamation. Due to the
significant number of mines that the Company operates and the extensive amount
of information that must be reviewed and estimates that must be made to assess
the effects of the standard, the impact of adoption of SFAS 143 on the Company's
financial position or results of operations has not yet been determined.
4. Income Taxes
Income tax (benefit) expense included in the consolidated statement of
earnings is as follows:
Year Ended October 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ------------------ ------------------
(in thousands)
(Restated) (Restated) (Restated)
Current:
Federal $ (6,389) $ 13,735 $ 9,048
State and local 148 1,447 (1,896)
----------------- ------------------ ------------------
Total current (6,241) 15,182 7,152
----------------- ------------------ ------------------
Deferred:
Federal (3,639) 24,562 36,398
State and local (621) 3,491 5,438
----------------- ------------------ ------------------
Total deferred (4,260) 28,053 41,836
----------------- ------------------ ------------------
Total income tax (benefit)
expense $ (10,501) $ 43,235 $ 48,988
================= ================== ==================
42
For the tax year ended October 31, 2001, Massey's consolidated federal
income tax return includes the operations of A.T. Massey and Fluor until the
date of the Spin-Off.
A reconciliation of income tax (benefit) expense calculated at the federal
statutory rate of 35% to the Company's income tax (benefit) expense on (loss)
earnings is as follows:
Year Ended October 31,
-----------------------------------------------------------
2001 2000 1999
----------------- ------------------ ------------------
(in thousands)
(Restated) (Restated) (Restated)
U.S. statutory federal tax expense $ (5,572) $ 42,618 $ 53,036
Increase (decrease) in taxes resulting from:
State taxes (170) 3,781 2,282
Items without tax effect 700 5,235 3,729
Depletion (4,496) (7,657) (9,625)
FSC exempt income (963) (952) (1,242)
Other, net -- 210 808
----------------- ------------------ ------------------
Total income tax (benefit) expense $ (10,501) $ 43,235 $ 48,988
================= ================== ==================
Deferred taxes reflect the tax effects of differences between the amounts
recorded as assets and liabilities for financial reporting purposes and the
amounts recorded for income tax purposes. The tax effects of significant
temporary differences giving rise to deferred tax assets and liabilities are as
follows:
October 31,
---------------------------------------
2001 2000
------------------ ------------------
(in thousands)
(Restated) (Restated)
Deferred tax assets:
Postretirement benefit obligations $ 28,428 $ 28,444
Worker's compensation 15,975 12,611
Reclamation and mine closure 32,416 34,123
Alternative minimum tax credit carryforwards 59,549 59,549
State NOL 6,959 5,536
Other 28,287 24,803
------------------ ------------------
171,614 165,066
Valuation allowance for deferred tax assets (66,508) (65,085)
------------------ ------------------
Deferred tax assets, net 105,106 99,981
------------------ ------------------
Deferred tax liabilities:
Plant, equipment and mine development (187,136) (185,385)
Mining property and mineral rights (110,748) (112,574)
Other (44,094) (46,281)
------------------ ------------------
Total deferred tax liabilities (341,978) (344,240)
------------------ ------------------
Net deferred tax liabilities $ (236,872) $ (244,259)
================== ==================
43
The Company's deferred tax assets include alternative minimum tax ("AMT")
credits of $59.5 million each at October 31, 2001 and 2000. The AMT credits have
no expiration date. Subsequent to the Spin-Off, the Company completed an
assessment of its deferred tax balances and the likelihood of realizing AMT
credit carryforwards as a stand-alone company. Management determined, more
likely than not, that these credits will not be realized. Accordingly, the
Company reclassified tax reserves at October 31, 2000 to reflect the full
valuation allowance related to these credits.
The Company has a reserve for taxes that may become payable as a result of
audits in future periods with respect to previously filed tax returns included
in deferred tax liabilities (separate disclosure has not been made because the
amount is not considered material). It is the Company's policy to establish
reserves for taxes that may become payable in future years as a result of an
examination by tax authorities. The Company establishes the reserves based upon
management's assessment of exposure associated with permanent tax differences
(i.e., tax depletion expense, etc.), tax credits and interest expense applied to
temporary difference adjustments. The tax reserves are analyzed periodically (at
least annually) and adjustments are made as events occur to warrant adjustment
to the reserve. For example, if the statutory period for assessing tax on a
given tax return or period lapses, the reserve associated with that period will
be reduced. In addition, the adjustment to the reserve will reflect additional
exposure based on current calculations. Similarly, if tax authorities provide
administrative guidance or a decision is rendered in the courts, appropriate
adjustments will be made to the tax reserve. The tax reserve was lowered in
fiscal years ending October 31, 1999 and 2001, by $3.8 million and $0.6 million,
respectively, reflecting the reduction in exposure due to the lapsing of the
statutory periods for assessing tax on tax periods ending in 1995 and 1997,
partially offset by additional exposures identified for tax years that remained
open. The tax reserve was increased in the fiscal year ending October 31, 2000
by $0.7 million for increased state and federal tax exposure in open years,
partially offset by the lapsing of the statutory period for assessing tax on the
tax period ending in 1996. In addition, payments were applied against the
reserve for federal taxes and state taxes of $172,000 and $821,000 as a result
of audits conducted during the fiscal years ended October 31, 2000 and 2001,
respectively.
Massey's federal income tax returns have been examined by the Internal
Revenue Service, or Statutes of Limitations have expired through 1997.
Management believes that the Company has adequately provided for any income
taxes and interest that may ultimately be paid with respect to all open tax
years.
5. Retirement Benefits
Prior to October 1, 2001, Massey sponsored two non-contributory defined
benefit pension plans, which covered substantially all administrative and
non-union employees hired prior to September 1, 1994. As of October 1, 2001,
these plans were merged together with each participant group retaining its
benefit formula. These formulas provide pension benefits based on the employee's
years of service and average annual compensation during the highest five
consecutive years of service. In addition, the new merged plan covers
substantially all administrative and non-union employees of the Company who were
previously covered under a non-contributory defined contributory pension plan.
These participants will accrue benefits under a third cash balance formula with
contribution credits based on hours worked. Funding for the plan is generally at
the minimum annual contribution level required by applicable regulations.
The plans assets are held by an independent trustee and, in certain
circumstances, by insurance carriers. The plans assets include cash and cash
equivalents, corporate and government bonds, preferred and common stocks,
investments in mutual funds and annuity contracts. The fair market value of the
plans assets was $196 million at October 31, 2001.
44
Net periodic pension income for the defined benefit pension plan includes
the following components:
Year Ended October 31,
-------------------------------------------------------------
2001 2000 1999
------------------ ----------------- ------------------
(in thousands)
Service cost $ 2,657 $ 2,509 $ 3,451
Interest cost 9,498 9,114 8,987
Expected return on plan assets (22,245) (20,732) (18,281)
Amortization of unrecognized net
asset (1,800) (2,116) (872)
Amortization of prior service cost 57 56 56
------------------ ----------------- ------------------
Net periodic pension income $ (11,833) $ (11,169) $ (6,659)
================== ================= ==================
The weighted average assumptions used in determining pension obligations
are as follows:
At October 31,
--------------------------------------
2001 2000
----------------- -----------------
Discount rate 7.25% 7.75%
Rate of increase in compensation levels 4.00% 4.00%
Expected long-term rate of return on plan assets 9.50% 9.50%
45
The following table sets forth the change in benefit obligation, plan
assets and funded status of the Company's defined benefit pension plan:
At October 31,
-----------------------------------------------
2001 2000
---------------------- ----------------------
(in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 126,687 $ 123,865
Service cost 2,657 2,509
Interest cost 9,498 9,114
Actuarial loss (gain) 7,626 (3,262)
Benefits paid (6,274) (5,539)
---------------------- ----------------------
Benefit obligation at end of year $ 140,194 $ 126,687
---------------------- ----------------------
Change in plan assets
Fair value at beginning of year $ 237,551 $ 221,223
Actual return on assets (35,156) 21,840
Company contributions 10 27
Benefits paid (6,274) (5,539)
---------------------- ----------------------
Fair value at end of year $ 196,131 $ 237,551
---------------------- ----------------------
Funded status $ 55,937 $ 110,864
Unrecognized net actuarial loss (gain) 20,743 (46,083)
Unrecognized prior service cost 461 518
---------------------- ----------------------
Pension assets 77,141 65,299
Amount included in current liabilities 3,259 2,441
---------------------- ----------------------
Noncurrent asset $ 80,400 $ 67,740
====================== ======================
Under labor contracts with the United Mine Workers of America Benefit
Funds, certain operations make payments into two multi-employer defined benefit
pension plan trusts established for the benefit of certain union employees. The
contributions are based on tons of coal produced and hours worked. Such payments
aggregated approximately $0.1 million each in 2001, 2000 and 1999.
Under the Coal Industry Retiree Health Benefits Act of 1992, coal producers
are required to fund medical and death benefits of certain retired union coal
workers based on premiums assessed by the United Mine Workers of America. Based
on available information at October 31, 2001, the Company's obligation
(discounted at 7.25%) under the Act is estimated at approximately $52.3 million.
The cost of the Company's obligation will be recognized as expense as payments
are assessed. The Company expense related to this obligation for the years ended
October 31, 2001, 2000, and 1999 totaled $5.0 million, $3.6 million, and $3.5
million, respectively.
Certain union employees are covered by a non-contributory defined
contribution pension plan. Contributions to the defined contribution retirement
plan are based on hours worked.
Until prior to October 1, 2001, the Company sponsored a separate
non-contributory defined contribution pension plan for substantially all
administrative and non-union employees, on September 30, 2001, the plan was
frozen and assets were merged into an existing salary deferral and profit
sharing plan. Employees covered under the frozen plan now participate in the
defined benefit pension plan under the third formula discussed in the first
paragraph of this Note.
46
For certain employees, the Company sponsors a contributory defined
contribution pension plan for eligible employees with Company contributions
based on hours worked. Effective October 1, 2001, the salary deferral rate was
increased from 10% to 15% of eligible compensation and the Company matches 30%
on the first 10% of employee deferrals. The Company may make an additional
discretionary contribution to the plan.
For the years ended October 31, 2001, 2000, and 1999, Company contributions
to these three plans aggregated approximately $7.5 million, $5.6 million, and
$5.4 million, respectively.
The Company also sponsors a salary deferral and profit sharing plan
covering substantially all administrative and non-union employees. Effective
October 1, 2001, the salary deferral rate was increased from 10% to 15% of
eligible compensation and the Company matches 30% on the first 10% of employee
deferrals. The Company may make additional discretionary contributions to the
plan. Total Company contributions aggregated approximately $2.5 million, $2.2
million, and $2.6 million, in 2001, 2000, and 1999, respectively.
The Company also sponsors defined benefit health care plans that provide
post-retirement medical benefits to eligible union and non-union members. To be
eligible, retirees must meet certain age and service requirements. Depending on
year of retirement, benefits may be subject to annual deductibles, coinsurance
requirements, lifetime limits, and retiree contributions. Service costs are
accrued currently. The accumulated postretirement benefit obligation at October
31, 2001 was determined in accordance with the current terms of the Company's
health care plans, together with relevant actuarial assumptions and health care
cost trend rates projected at an annual rate of 8.0 percent ranging down to 5.0
percent in 2007 (5.7% ranging down to 5.0% in 2002 at October 31, 2000), and
remaining level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the medical plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
------------------------------------
(in thousands)
Effect on total of service and interest costs components $ 1,990 $ (1,591)
Effect on accumulated postretirement benefit obligation $ 15,435 $ (12,498)
Net periodic postretirement benefit cost includes the following components:
Year Ended October 31,
-----------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
(in thousands)
Service cost $ 3,426 $ 3,543 $ 3,850
Interest cost 5,333 4,611 4,092
Amortization of prior service cost 140 140 140
------------------ ------------------ ------------------
Net periodic postretirement benefit
cost $ 8,899 $ 8,294 $ 8,082
================== ================== ==================
47
The following table sets forth the change in benefit obligation of the
Company's postretirement benefit plans:
At October 31,
-----------------------------------------------
2001 2000
---------------------- ----------------------
(in thousands)
Change in benefit obligation
Benefit obligation at beginning of year $ 66,355 $ 58,203
Service cost 3,426 3,543
Interest cost 5,333 4,611
Actuarial loss 16,857 2,397
Benefits paid (2,405) (2,399)
---------------------- ----------------------
Benefit obligation at end of year $ 89,566 $ 66,355
====================== ======================
Funded status $ (89,566) $ (66,355)
Unrecognized net actuarial loss (gain) 12,965 (3,892)
Unrecognized prior service cost 1,496 1,636
---------------------- ----------------------
Accrued postretirement benefit obligation (75,105) (68,611)
Amount included in other current liabilities 3,044 2,659
---------------------- ----------------------
Noncurrent liability $ (72,061) $ (65,952)
====================== ======================
The discount rate used in determining the postretirement benefit obligation
was 7.25 percent at October 31, 2001 and 7.75 percent at October 31, 2000.
6. Fair Value of Financial Instruments
Certain Company subsidiaries provide loans to West Virginia businesses at
prevailing interest rates as part of an economic development program that
provides tax credits as incentives. Outstanding loans at October 31, 2001 and
2000 amounted to $10.5 million and $11.3 million, respectively, of which $2.4
million and $3.0 million, respectively, are unsecured. These loans are estimated
to be at fair value, after recording an allowance for loan losses of $2.1
million at October 31, 2001 and $2.9 million at October 31, 2000, based on
future cash flows and related credit risk. The current portion of these notes is
included in trade and other accounts receivable. The noncurrent portion is
included in other noncurrent assets.
Prior to the Spin-Off (see Note 11), the Company loaned funds in excess of
its operating and capital needs to Fluor and received interest on the average
daily balance at 130% of the federal short-term rate determined in accordance
with the Internal Revenue Code of 1986. Fluor repaid these loans to the Company
as the need arose. The Company believed these financial practices to be a fair
arrangement with its prior parent and concluded that any further assessment to
determine fair market value of amounts due from Fluor would not be cost
beneficial. Interest income for 2001, 2000, and 1999 related to these loans
amounted to $1.5 million, $16.6 million and $11.7 million, respectively. These
loans were classified as a reduction to shareholders' equity in the consolidated
balance sheet as of October 31, 2000, and were settled as part of the Spin-Off
transaction.
Included in other noncurrent assets as of October 31, 2000, is $21.8
million of Fluor commercial paper acquired in the open market at prevailing
interest rates. As of the Spin-Off, Massey ceased to have any investment in
Fluor commercial paper. Interest income associated with the Fluor commercial
paper was not material for the year ended October 31, 2001, and amounted to $1.6
million for the year ended October 31, 2000 and $1.1 million for the year ended
October 31, 1999. The commercial paper is classified as an available-for-sale
security, and is carried at cost, which approximates fair value. Unrealized
gains or losses are insignificant. Due to restrictions on the use of the
commercial paper, it has been classified as a noncurrent asset.
In addition, the Company has outstanding $248.2 million of short-term debt
at October 31, 2001 (see Note 12). The carrying amount of this debt approximates
its fair value.
The Company's long-term debt consists entirely of 6.95 percent Senior Notes
due March 1, 2007 (see Note 12). The fair value of the Senior Notes at October
31, 2001, based on currently available market information, was $305.9 million.
48
7. Other Noncurrent Liabilities
Other noncurrent liabilities comprise the following:
At October 31,
-----------------------------------------------
2001 2000
---------------------- ----------------------
(in thousands)
(Restated) (Restated)
Reclamation $ 107,448 $ 111,101
Other post-employment benefits (Note 5) 72,061 65,952
Workers' compensation and black lung 75,810 81,746
Other 62,477 32,092
---------------------- ----------------------
$ 317,796 $ 290,891
====================== ======================
Reclamation
The Company accrues for the costs of current mine disturbance and final
mine closure, as coal is mined, on a unit-of-production basis over the proven
and probable reserves as defined in Industry Guide 7. For the years ended
October 31, 2001, 2000, and 1999, the Company accrued approximately $6.4
million, $6.5 million, and $5.7 million, respectively; towards final mine
closure reclamation, excluding reclamation cost adjustments identified below.
The Company regularly reviews its reclaimation cost estimates and accrued
liabilities on a permit-by-permit basis and makes necessary adjustments,
including permit changes and revisions to costs and productivities to reflect
current experience. When changes in cost estimates or regulatory requirements
cause the Company's accrued liability for a permit to exceed its total estimated
reclamation liability, the difference is credited to income. These "re-costing"
adjustments are recorded as a decrease in cost of produced coal revenue and
totaled $6.6 million, $7.2 million and $0.8 million for the years ended October
31, 2001, 2000, and 1999, respectively. The Company's management believes it is
making adequate provision for all expected future reclamation costs. Final
reclamation costs for all operations as of October 31, 2001 are estimated to be
approximately $154 million.
Workers' Compensation and Black Lung
The Company is responsible under the Federal Coal Mine Health and Safety
Act of 1969, as amended, and various states' statutes for the payment of medical
and disability benefits to employees and their dependents resulting from
occurrences of coal worker's pneumoconiosis disease (black lung). In addition,
the Company is liable for workers' compensation benefits for traumatic injuries
under the workers' compensation laws in the states in which it has operations.
The Company provides for federal and state black lung claims principally
through a self-insurance program. The Company uses the service cost method to
account for its self-insured black lung obligation. The liability measured under
the service cost method represents the discounted future estimated cost for
terminated employees either receiving or are projected to receive benefits, and
the portion of the projected liability relative to prior service for active
employees who are projected to receive benefits. An annual actuarial study is
prepared by independent actuaries using certain assumptions to determine the
liability. The calculation is based on assumptions regarding disability
incidence, medical costs, mortality, death benefits, dependents and interest
rates. These assumptions are derived from actual Company experience and
credible outside sources.
The Company uses a combination of three methods for coverage of traumatic
injury liability pursuant to workers' compensation laws including self-insurance
programs, insurance coverage of claims, and participation in state workers'
compensation fund. The Company accrues for traumatic injury claims as incurred
under its self-insurance program. Additionally, for self-insured claims, a
provision for incurred but not reported claims is recorded.
Expense for black lung under the service cost method represents the service
cost, which is the portion of the present value of benefits allocated to the
current year, interest on the accumulated benefit obligation, and amortization
of unrecognized actuarial gains and losses. The Company amortizes unrecognized
actuarial gains and losses over a five-year period. If the remaining service
period of active participants were less than five years, the amortization period
would be reduced to the remaining service period.
49
Expenses for black lung benefits and workers' compensation related benefits
include the following components:
Year Ended October 31,
-----------------------------------------------------------
2001 2000 1999
(Restated) (Restated) (Restated)
------------------ ----------------- ------------------
(in thousands)
Self-insured black lung benefits:
Service cost $ 1,792 $ 1,558 $ 1,874
Interest cost 3,054 3,418 3,421
Amortization of actuarial gain (4,080) (3,174) (1,447)
------------------ ----------------- ------------------
$ 766 $ 1,802 $ 3,848
Other workers' compensation benefits 27,106 16,383 19,286
------------------ ----------------- ------------------
$ 27,872 $ 18,185 $ 23,134
================== ================= ==================
The actuarial assumptions used in the determination of black lung
benefits included a discount rate of 7.25% as of October 31, 2001, (7.75% as of
October 31, 2000 and October 31, 1999) and a black lung benefit cost escalation
rate of 3% in each year. Payments for benefits, premiums and other costs related
to workers' compensation and black lung liabilities were $25.0 million, $20.8
million, and $22.3 million in 2001, 2000, and 1999, respectively.
50
Workers' compensation and black lung liability consisted of the following:
At October 31, At October 31,
2001 2000
(In thousands) (Restated) (Restated)
- -----------------------------------------------------------------------------------------
Accrued self-insured black lung obligation $ 59,578 $ 60,817
Workers' compensation (traumatic injury) 31,535 27,402
-------------- --------------
Total accrued workers' compensation and black lung $ 91,113 $ 88,219
Less amount included in other current liabilities 15,303 6,473
-------------- --------------
Workers' compensation & black lung in other
noncurrent liabilities $ 75,810 $ 81,746
============== ==============
The reconciliation of changes in the black lung benefit obligation is as
follows:
(In thousands) At October 31, At October 31,
2001 2000
(Restated) (Restated)
- ------------------------------------------------------------------------- ----------------
Beginning of year accumulated black lung obligation $ 40,414 $ 45,050
Service cost 1,792 1,558
Interest cost 3,054 3,418
Actuarial loss (gain) 5,766 (7,607)
Benefit payments (2,524) (2,005)
-------------- --------------
End of year accumulated black lung obligation $ 48,502 $ 40,414
Unamortized net gain 11,076 20,403
-------------- --------------
Accrued self-insured black lung obligation $ 59,578 $ 60,817
============== ==============
8. Stock Plans
Massey's executive stock plans provide for grants of non-qualified or
incentive stock options, restricted stock awards and stock appreciation rights
("SARS"). All executive stock plans are administered by the Compensation
Committee of the Board of Directors (the "Committee") comprised of outside
directors. Option exercise prices are determined by the Committee and are equal
to the average of the high and low of the quoted market price of the Company's
common stock on the date of grant. Options and SARS normally extend for 10 years
and become exercisable over a vesting period determined by the Committee, which
can include accelerated vesting for achievement of performance or stock price
objectives.
Stock based grants (restricted shares, stock options and SARS as discussed
herein) awarded to employees of the Company prior to the Spin-Off, were
generally converted to equivalent instruments in Massey following its separation
from Fluor. In this regard, the outstanding number of grants were increased by
multiplying the applicable amount by 4.056 (the "Conversion Ratio"), except for
the grants held by Mr. Blankenship, as discussed below. Similarly, where
applicable, the exercise price was reduced by dividing the exercise price prior
to the Spin-Off by the Conversion Ratio. The Conversion Ratio applied to the
outstanding awards held by Company employees was utilized to preserve the
intrinsic value of such awards. It was determined by dividing the closing price
of Fluor Corporation common stock on the date of the Spin-Off ($36.50) by the
opening price for Massey Energy common stock the first trading day after the
spin-off ($9.00). There were no accounting implications of having reduced the
exercise price since the aggregate intrinsic value of the awards immediately
after the change was not greater than the aggregate intrinsic value of the
awards immediately before the change and the ratio of the exercise price per
share to the market value per share was not reduced.
Stock based grants existing on the date of the Spin-Off specific to Mr.
Blankenship were administered pursuant to an agreement between Mr. Blankenship,
Fluor Corporation, A. T. Massey Coal Company, Inc. and New Fluor. Mr.
Blankenship's restricted stock and SARS after the spin-off were converted on a
basis of one share or unit of Massey for each share or unit of Fluor.
Additionally, Mr. Blankenship's outstanding stock options were converted at a
predetermined rate of 3.4 Massey options for each Fluor option. Similarly, the
exercise price of Mr. Blankenship's outstanding stock options were reduced by
the 3.4 ratio.
During 2001 the Company issued 875,961 nonqualified stock options that vest
over four years and expire in ten years. During 2000 and 1999, prior to the
Spin-Off, 290,080 and 113,860 options (in Fluor stock), respectively, were
51
awarded to Massey employees. The 2000 awards cliff vest after four years and
expire in ten years, with accelerated vesting provisions based on the price of
Massey's stock. The accelerated vesting provisions were achieved during the
first quarter of 2001. The 1999 awards vest over four years and expire in ten
years.
No grants of SARS were made to Massey employees during the period 1999
through 2001.
Restricted stock awards issued under the plans provide that shares awarded
may not be sold or otherwise transferred until restrictions have lapsed or
performance objectives have been attained. Upon termination of employment,
shares upon which restrictions have not lapsed must be returned to the Company.
Restricted stock issued under the plans totaled 266,411 shares in 2001. Prior to
the Spin-Off, Fluor Corporation restricted stock issued to Massey employees
totaled 31,390 shares in 2000 (117,618 shares when applying the Spin-Off
conversion ratios at date of grant), and 42,647 shares in 1999 (98,946 shares
when applying the Spin-Off conversion ratios at date of grant). Vested
restricted stock is included in the weighted average shares outstanding
calculation for basic earnings per share. Unvested restricted stock is included
in the weighted average shares outstanding calculation for diluted earnings per
share. See the Earnings Per Share section of Note 3 for further discussion.
As permitted by Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company has
elected to continue following the guidance of APB Opinion No. 25, "Accounting
for Stock Issued to Employees," for measurement and recognition of stock-based
transactions with employees. For the fiscal years ended October 31, 2001, 2000
and 1999, expenses related to Massey's various stock compensation plans (with
the exception of stock options) totaled $5.8 million, $3.8 million and $6.3
million, respectively. Under APB Opinion No. 25, no compensation cost is
recognized for the Company's stock option plans because vesting provisions are
based only on the passage of time and because the Company granted the options at
an exercise price equal to the average of the high and low of the quoted market
price of the Company's stock on the date of grant. Had the Company recorded
compensation expense using the accounting method recommended by SFAS No. 123,
net earnings and diluted earnings per share would have been reduced to the pro
forma amounts as follows:
Year ended 2001 2000 1999
October 31, (Restated) (Restated) (Restated)
- ----------------- ---------- ---------- ----------
(in thousands, except per share amounts)
Net (loss) earnings
As reported $ (5,420) $ 78,531 $ 102,543
Pro forma $ (6,795) $ 76,931 $ 101,773
Diluted net (loss)
earnings per share
As reported $ (0.07) $ 1.07 $ 1.40
Pro forma $ (0.09) $ 1.05 $ 1.39
The estimated fair value as of the date of grant for options granted to
Massey employees in 2001, 2000 and 1999 was determined using the Black-Scholes
option-pricing model based on the following weighted average assumptions
(assumptions applied in 2000 and 1999 were determined by Fluor):
2001 2000 1999
----- ----- -----
Expected option lives (years) 5 6 6
Risk-free interest rates 4.29% 6.03% 4.43%
Expected dividend yield 0.81% 1.74% 1.37%
Expected volatility 37.1% 39.8% 33.4%
The weighted average fair value of options granted by the Company during
2001 determined using the Black-Scholes option-pricing model was $7.22 and the
weighted average fair value of options granted by Fluor to Massey employees
during 2000 and 1999 determined using the Black-Scholes option-pricing model was
$18.00 and $15.06, respectively (prior to conversion).
52
The following table summarizes stock option activity:
Weighted Average
----------------------------------------------------
Exercise Price
Stock Options Per Share
----------------- ------------------
Outstanding at October 31, 1998 335,816 $ 49.24
Granted 113,860 $ 42.88
Expired or Cancelled (6,950) $ 56.77
Exercised (980) $ 35.09
----------------- ------------------
Outstanding at October 31, 1999 441,746 $ 47.51
Granted 290,080 $ 44.31
Expired or Cancelled (52,010) $ 48.61
Exercised (6,755) $ 35.09
----------------- ------------------
Outstanding at October 31, 2000 673,061 $ 47.16
Conversion adjustment to shares at Spin-Off 1,960,581
Granted 875,961 $ 19.78
Expired or Cancelled (375,486) $ 12.12
Exercised (817,110) $ 11.47
----------------- ------------------
Outstanding at October 31, 2001 2,317,007 $ 14.89
Exercisable at:
October 31, 1999 (pre-conversion shares) 227,827
October 31, 2000 (pre-conversion shares) 257,850
October 31, 2001 1,243,903
Characteristics of outstanding stock options at October 31, 2001 are as
follows:
Outstanding Options Exercisable Options
----------------------------------------------------------------- ------------------------------------------
Range of Exercise Weighted Average Weighted Average Weighted Average
Price Shares Remaining Life Exercise Price Shares Exercise Price
- ----------------- ------------------ ------------------ ------------------ ------------------ ------------------
$ 8.65 - 10.93 977,140 7.4 $ 10.52 846,336 $ 10.51
$12.50 - 13.03 178,814 5.6 $ 12.75 109,709 $ 12.68
$14.56 - 18.86 287,858 4.3 $ 16.17 287,858 $ 16.17
$19.42 - 20.11 873,195 9.9 $ 19.78 -- --
------------------ ------------------
$ 8.65 - 20.11 2,317,007 7.8 $ 14.89 1,243,903 $ 12.01
================== ================== ================== ================== ==================
53
At October 31, 2001, there are 5,320,765 shares available for future grant
under the Company's stock plans. Available for grant includes shares which may
be granted as either stock options or restricted stock, as determined by the
Committee under the Company's various stock plans.
9. Lease Obligations
Certain mining and other equipment is leased under operating leases.
Certain of these leases provide options for the purchase of the property at the
end of the initial lease term, generally at its then fair market value, or to
extend the terms at its then fair rental value. Rental expense for the years
ended October 31, 2001, 2000, and 1999 was $54.3 million, $28.4 million, and
$22.0 million, respectively.
The following presents future minimum rental payments, by year, required
under operating leases with initial terms greater than one year, in effect at
October 31, 2001:
Minimum Rentals (in thousands)
Year ------------------------------
2002 $ 51,922
2003 47,354
2004 43,849
2005 39,968
2006 26,546
Thereafter 7,748
----------
$ 217,387
==========
10. Contingencies and Commitments
On October 20, 1999, the U.S. District Court for the Southern District of
West Virginia issued an injunction which prohibits the construction of valley
fills over both intermittent and perennial stream segments as part of mining
operations. While the Company is not a party to this litigation, virtually all
mining operations, including Massey, utilize valley fills to dispose of excess
materials. 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 WVDEP in Federal Court. On July 13, 2001, the Fourth Circuit
Court of Appeals denied the plaintiffs' petition for rehearing. In October 2001,
the plaintiffs appealed the Fourth Circuit decision to the U.S. Supreme Court.
On January 22, 2002, the U.S. Supreme Court refused to hear the appeal.
Accordingly, challenges to WVDEP's enforcement of its mining program cannot be
maintained in federal court. However, challenges may be raised in state court
against WVDEP or in federal court against the federal Office of Surface Mining
("OSM"), the agency that oversees state regulation of surface mining. If and to
the extent state courts rule that the WVDEP is prohibited from issuing permits
for the construction of valley fills or federal courts rule that OSM is
compelled to impose such a prohibition on WVDEP, all or a portion of Massey's
mining operations could be affected if legislation is not passed which limits
the impact of such a ruling. Massey believes it has obtained all the permits
required for its current operations, including permits for the construction of
valley fills. The expiration dates of the permits are largely immaterial as the
law provides for a right of successive renewal. We are not aware of any attempts
to revoke our current valley fill permits. Because of the uncertainties
associated with the possible outcomes of the valley fill cases, we cannot
estimate the potential or expected impact on our operations. Further, we cannot
estimate the length of time we would be able to continue operating under our
existing permits or the rate at which production can be expected to decline if
valley fills are determined to no longer be an acceptable means of disposing of
our fill because there are numerous variables involved in making such an
estimate. Therefore, any attempt to forecast such an estimate is highly
problematic and likely to be unreliable. The Company expects that it would be
able to continue operating surface mines even if the construction of valley
fills is prohibited, however, the costs of such mining will increase as a result
of using alternate methods to dispose of excess materials. The Company's
competitors in the Central Appalachian region would be subject to the same
restrictions and, therefore, would be expected to incur similarly increased
costs. The Company anticipates that the restrictions on mining and general
increases in costs would be reflected in higher coal prices that would tend to
offset much of the increased costs.
On July 31, 1997, the Company acquired United Coal Company and its
subsidiary, Wellmore Coal Corporation ("Wellmore"). Wellmore was party to a coal
supply agreement (the "CSA") with Harman Mining Corporation and certain of its
affiliates ("Harman"), pursuant to which Harman sold coal to Wellmore. In
December 1997, Wellmore declared force majeure under the CSA and reduced the
amount of coal to be purchased from Harman as a result thereof. Wellmore
declared force majeure because its major customer for the coal purchased under
the CSA was forced to close its Pittsburgh, Pennsylvania coke plant due to
regulatory action. The Company subsequently sold Wellmore, but retained
responsibility for any claims relating to this declaration of force majeure. In
54
June 1998, Harman filed a breach of contract action against Wellmore in Buchanan
County, Virginia Circuit Court. In fiscal year 2000, a jury returned a verdict
finding that Wellmore did breach the CSA and awarding Harman $6 million in
damages. The Company on August 6, 2001 filed a petition for appeal of the
adverse determination on liability and damages to the Supreme Court of Virginia.
Based on management's weighting of the probable outcomes of the Company's appeal
in this matter, an accrual of $5.4 million with respect to the Virginia verdict
was established in fiscal year 2000. Additionally, on October 29, 1998, Harman
and its sole shareholder, Hugh Caperton, filed a separate action against Massey
and certain of its 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.
The case had not yet gone to trial as of January 31, 2002.
On October 11, 2000, a partial failure of Martin County Coal Corporation's
coal refuse impoundment released approximately 230 million gallons of coal
slurry into adjacent underground mine workings. The slurry then discharged into
two tributary streams of the Big Sandy River in eastern Kentucky. No one was
injured in the discharge. Clean up efforts began immediately and are largely
complete. The States of Kentucky and West Virginia have issued various notices
of violation related to the discharge and ordered remedial measures. Fines and
penalties, which may not be covered by insurance, have not yet been assessed.
The Company has begun informal discussions with various agencies with respect to
the resolution of the notices of violation, including potential fines and
penalties.
Several lawsuits have been brought by downstream residents and other
individual plaintiffs claiming to be damaged by the spill. These suits assert
trespass, property damage, nuisance and other claims, and seek compensatory and
punitive damages. Certain of these suits seek to be certified as class action
lawsuits. These lawsuits remain in their initial stages.
Martin County Coal is continuing to seek approval from the applicable
agencies for alternate refuse disposal options related to operations of Martin
County Coal's preparation plant.
The Company recorded a $3 million charge in the fourth quarter of 2000
relating to the slurry spill. At January 31, 2002, this amount was the Company's
best estimate based on current facts and circumstances of its uninsured
exposure. The charge represents an accrual of $46.5 million in estimated
spill-related clean-up costs and liabilities net of $43.5 million in probable
insurance recoveries. Spill-related clean-up costs include remediation costs and
fines and penalties. In the consolidated balance sheet as of October 31, 2001
and 2000, the accruals related to this matter of $11.5 million and $46.5
million, respectively, are included in other current liabilities and probable
insurance recoveries of $20.5 million and $43.5 million, respectively, are
included in trade and other accounts receivable. Massey continues to seek
insurance reimbursement of any and all covered costs. The Company is not aware
of any instance in which it was or is not in compliance with provisions of its
insurance agreements. To date, the Company's insurance carriers have not
disputed coverage under the Company's policies for claims made against it
relating to the October 11, 2000 incident, except that one of our carriers has
stated that it believes its policy does not provide coverage for punitive
damages. Although the remediation efforts are largely complete, the degree of
uncertainty with respect to potential claims, fines and penalties make it
reasonably possible that the Company's estimates with respect to the slurry
spill could change. Ultimate resolution with respect to any current or potential
legal claims could take an extended period (several years) to resolve if
litigated.
The West Virginia Department of Environmental Protection ("WVDEP") has also
issued orders to various Massey subsidiaries ordering them to show cause why
permits for those subsidiaries should not be suspended or revoked because of
alleged patterns of violations relating to water quality. A pattern of
violations can be found when there are two or more violations of a same or
similar type within a 12-month period. The show cause orders set forth below
typically involve between 3 and 5 violations in the alleged pattern. In
particular, WVDEP has issued such orders to: (1) Green Valley Coal Company, for
two refuse area permits on March 6, 2001 for three notices of violation related
to effluent limits on a refuse area permit, and on August 21, 2001 for five
notices of violation relating to effluent limits and the hydrologic balance on
another refuse area permit; (2) Marfork Coal Company, for its refuse impoundment
permit on June 7, 2001 for seven notices of violation relating to effluent
limits, the hydrologic balance and sediment control on its refuse impoundment
permit; (3) Independence Coal Company, for its preparation plant permit on
August 24, 2001 for three notices of violation and three cessation orders
relating to sediment control on its preparation plant permit, for its refuse
impoundment permit on August 29, 2001 for two notices of violation and one
cessation order relating to effluent limits, refuse placement and sediment
control on its refuse impoundment permit, and for its Justice Mine permit on
September 19, 2001 for three notices of violation and one cessation order
relating to drainage control on its Justice Mine permit; and (4) Omar Mining
Company, for its joint refuse area and preparation plant permit on October 5,
2001 for four notices of violation and two cessation orders relating to drainage
55
control and effluent limits on its joint refuse area and preparation plant
permit. Hearings for these subsidiaries to show cause why the permits should not
be suspended or revoked were held for Marfork on October 25, 2001; Green Valley
on June 14, 2001 and November 6, 2001; Independence on December 5-6, 2001; and
Omar on January 22, 2002. 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. On January
2, 2002, WVDEP entered an order finding a pattern of violations and suspending
Green Valley's above-referenced refuse area permits for three days. Green Valley
obtained a stay of enforcement of the order pending appeal and filed an appeal
of the order. On January 14, 2002, WVDEP entered an order finding a pattern of
violations and suspending operations on Marfork's refuse impoundment permit for
fourteen days. Marfork obtained a stay of enforcement of the order pending
appeal and filed an appeal of the order. When the companies became aware of the
alleged violations they were quickly remedied or abated. The companies are
vigorously defending these enforcement actions.
The potential impact on operations from a permit suspension in the show
cause proceedings varies. For example, the Green Valley operations are not
currently mining or processing coal; therefore, a suspension at those operations
would not impact earnings. At the Independence, Omar and Marfork operations,
suspensions could impact earnings to the extent that downtime cannot be offset
by increases in production and/or coal sales at other times or at other
operations. The impact of suspensions at these operations could also vary
depending on when the suspensions are served. For example, suspensions served
over weekends or during scheduled maintenance periods would have lesser impacts.
We do not believe the impact of the suspensions is likely to be material. We
have not accrued lost profits for any WVDEP show cause proceeding detailed
herein. We would expect lost profits with respect to all of the WVDEP show cause
proceedings not to exceed $2 million. Historically, the remedy of revocation and
bond forfeiture has been reserved for operations that do not have the financial
ability to continue operations and conduct reclamation. The remedy of permit
revocation and bond forfeiture is used to obtain the operator's reclamation bond
in order to achieve reclamation. Given the Company's financial position, the
Company believes that its permits are not in jeopardy of revocation. The cost of
defending these matters is not material.
If the affected Massey subsidiaries are unsuccessful in defending or
reaching an acceptable resolution of these orders with the WVDEP, there is a
possibility that a suspension of operations could have a significant effect on
Massey's overall operations.
The Company is involved in various other legal actions incident to the conduct
of its businesses. Management does not expect a material impact to its results
of operations, financial position or cash flows by reason of these actions.
11. Spin-Off Transaction
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.
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:
o Massey no longer invests in Fluor commercial paper;
o 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;
o Fluor's previously issued $300 million of 6.95 percent Senior Notes
due March 1, 2007, with o interest payable semi-annually on March 1
and September 1 of each year, became the obligation of Massey; and
o 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.
12. Debt
The Company's outstanding short-term debt at October 31, 2001 consists of
$240.4 million of consolidated commercial paper and a note payable due November
1, 2001, of $7.8 million. The weighted average maturity of the commercial paper
was 14.7 days at October 31, 2001. The weighted average effective interest rate
of the outstanding commercial paper was 3.03 percent at October 31, 2001. Massey
56
has $150 million 364-day and $250 million 3-year revolving credit facilities,
which have been guaranteed by A. T. Massey, that serve to provide liquidity
backstop to Massey's commercial paper program and are also available to meet the
Company's ongoing liquidity needs. Borrowings under these facilities bear
interest based on (i) the London Interbank Offer Rate (LIBOR) plus a margin,
which is based on the Company's credit rating as determined by Moody's and
Standard & Poor's, (ii) the Base Rate (as defined in the facility agreements)
and (iii) the Competitive Bid Rate (as defined in the facility agreements).
There were no borrowings outstanding under these facilities at October 31, 2001.
The revolving credit facilities contain financial covenants requiring the
Company to maintain various financial ratios. Failure by the Company 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 the Company. The financial
covenants were amended as of October 31, 2001, for the periods ending October
31, 2001, through March 31, 2002. The Company was in compliance with these
amended covenants at October 31, 2001. The Company expects that it was not in
compliance with the amended covenant related to debt to EBITDA at December 31,
2001, however, the participant banks have granted a temporary waiver of this
financial covenant. The waiver expires on February 22, 2002. The Company is
seeking to obtain an amendment to the covenant level prior to the expiration of
the waiver and expects approval by the bank participants. If the Company is
unable to obtain an amendment to the covenant level, it would most likely result
in the Company seeking alternate sources of short-term financing, or issuing
longer term debt, which the Company has available through a $500 million debt
shelf registration originally filed with the Securities and Exchange Commission
by Fluor Corporation in March 1999.
As a result of the Spin-Off (see Note 11), the Company assumed from Fluor
$300 million of previously issued 6.95 percent Senior Notes (the "Notes") due
March 1, 2007. The Notes were issued in March 1997 and were sold at a discount
for an aggregate price of $296.7 million. Interest is payable semiannually on
March 1 and September 1 of each year, commencing September 1, 1997. The Notes
are redeemable, in whole or in part, at the option of the Company at any time at
a redemption price equal to the greater of (i) 100 percent of the principal
amount of the Notes or (ii) as determined by a Quotation Agent as defined in the
offering prospectus.
Total interest paid for the period ended October 31, 2001, was $34.8
million and was not material for the periods ended October 31, 2000 and 1999.
13. Appalachian Synfuel, LLC
Appalachian Synfuel, LLC (the "LLC") was formed in 1997 as a wholly owned
subsidiary of Fluor Corporation to manufacture and market synthetic fuel. The
LLC became a wholly owned subsidiary of Massey in November 2000 when the
Spin-Off occurred. As a provider of synthetic fuel, the LLC generates tax
credits for its owners; however, because of the Company's tax position it
currently is unable to utilize the tax credits generated by the LLC. In order to
monitize the value of our investment, we sought to sell an interest in the LLC
to an entity that could benefit currently from the tax credits generated. In
order to facilitate such a transaction, the LLC agreement was amended to divide
the ownership interest into three traunches, Series A, Series B and Series C.
Under the amended LLC agreement, the Series A owner generally is entitled
to the risks and rewards of the first 475,000 tons of production, including the
right to the related tax credits. The Series B owner is generally entitled to
the risks and rewards of all excess production up to the rated capacity of 1.2
million tons. The Series C owner is entitled to the amount of working capital on
the day of the transaction (March 15, 2001). The Series C owner is responsible
for providing recourse working capital loans to the Company going forward at a
specified indexed interest rate. As a result, the Series C owner will fund the
daily operations of the LLC. The Series C owner also has the responsibility at
the end of the term of the LLC agreement, to wind up the affairs of the LLC,
disposing of all assets and settling liabilities.
On March 15, 2001, the Company sold 98% of its Series A interest in the
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 including interest, and a contingent promissory note
that is paid on a cents per Section 29 credit dollar earned based on synfuel
tonnage shipped. A deferred gain of $11.9 million as of October 31, 2001, is
included in other noncurrent liabilities to be recognized ratably though 2007.
Massey's subsidiary, Marfork Coal Company, Inc., will continue to manage the
facility under an operating agreement.
14. Quarterly Information (Unaudited)
As discussed in Note 2, the Company recently resolved certain accounting
and disclosure issues resulting from a review by the Securities and Exchange
Commission (SEC) of its October 31, 2001 Annual Report on Form 10-K and
subsequently filed periodic reports on Forms 10-Q. The issues which are
explained more fully below involve corrections to the timing of recognition of
certain charges related to claims against the Company and its accounting method
for black lung liabilities and related expense recognition. The adjustments
mentioned below have been fully reflected in the Company's financial statements
presented herein. The quarterly financial information for 2001 is, by means of
this filing, being restated to reflect these adjustments.
The adjustments are as follows:
The consolidated financial statements for the year ended October 31, 2001
are restated to include a $6.9 million pre-tax charge related to the January
2002 settlement of claims for workers' compensation liabilities incurred by
independent contractors. This charge was previously reflected in the two-month
transition period ended December 31, 2001.
The consolidated financial statements for the year ended October 31, 2001
are restated to include a $2.5 million pre-tax charge in connection with a
wrongful employee discharge lawsuit. This charge was previously reflected in the
two-month transition period ended December 31, 2001.
The consolidated financial statements for each quarter of 2001 and 2000
have also been restated to apply the service period approach described in SFAS
No. 106 as allowed under SFAS No. 112 Employers' Accounting for Postemployment
Benefits to the Company's obligations with respect to coal worker's
pneumoconiosis (black lung). Previously, the Company utilized a different
actuarial approach. Trust assets previously offset against the Company's black
lung liability have been reclassified to other current assets and accounted for
under SFAS No. 115 Accounting for Certain Investments in Debt and Equity
Securities. The restatement increased pre-tax income in the three-months ended
January 31,2001, April 30, 2001, July 31, 2001, and October 31, 2001, by $0.7
million, $0.7 million, $0.7 million, and $0.3 million, respectively. The
restatement reduced pre-tax income in each quarter of 2000 by $0.3 million.
Also, as discussed in Note 2, the Company has reclassified all periods
presented to present Freight and Handling Revenues and Costs and Purchased Coal
Revenues and Costs on a gross rather than net basis.
Set forth below is the Company's quarterly financial information for the
year ended October 31, 2001. Included below are the previously reported as well
as restated amounts for each of the following periods: three-months ended
January 31, 2001, April 30, 2001, July 31, 2001, and October 31, 2001.
Three months ended
------------------------------------------------------------------------------------------------
(In thousands, except per January 31, April 30, July 31, October 31,
share amounts) 2001 2001 (1) 2001 (2) 2001 (3)
------------------------------------------------------------------------------------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- -------- ------------ --------
Total revenue $ 280,329 $ 324,728 $ 317,788 $ 359,644 $ 311,536 $ 354,990 $344,103 $ 392,499
Income (loss) from operations 3,590 4,248 8,367 9,025 (5,738) (5,081) 10,491 1,354
Earnings (loss) before taxes (2,216) (1,558) 3,249 3,907 (13,622) (12,965) 3,832 (5,305)
Net earnings (loss) (1,352) (951) 2,081 2,482 (9,394) (8,993) 7,615 2,042
Earnings (loss) per share:
Basic and diluted $ (0.02) $ (0.01) $ 0.03 $ 0.03 $ (0.13) $ (0.12) $ 0.10 $ 0.03
57
Three months ended
------------------------------------------------------------------------------------------------
(In thousands, except per January 31, April 30, July 31, October 31,
share amounts) 2000 2000 2000 (4) 2000 (5)
------------------------------------------------------------------------------------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported Restated
-------- -------- -------- -------- -------- -------- ------------ --------
Total revenue $ 272,291 $ 309,188 $ 278,403 $ 328,907 $ 293,370 $ 334,445 $ 296,608 $ 340,158
Income loss from operations 29,719 29,607 28,179 28,067 37,723 37,611 1,279 1,167
Earnings loss before taxes 34,421 34,309 32,377 32,265 48,399 48,287 7,017 6,905
Net earnings loss 23,853 23,785 20,857 20,789 32,365 32,297 1,729 1,661
Earnings loss per share:
Basic and diluted $ 0.32 $ 0.32 $ 0.28 $ 0.28 $ 0.44 $ 0.44 $ 0.02 $ 0.02
(1) On March 15, 2001, the Company sold a substantial interest in its synfuel
producing subsidiary, Appalachian Synfuel, LLC. See Note 11 for further
information. Additionally, earnings for the second quarter 2001 include a
reduction in cost of produced coal revenue of $6.5 million pre-tax and
interest income of $3.2 million pre-tax related to the refund of black lung
excise taxes.
(2) Loss for the third quarter 2001 includes a $7.5 million pre-tax adjustment
related to the write-off of unamortized longwall panel development costs.
The Company decided in the third quarter to move the longwall unit to
another mine to take advantage of better mining conditions. Additionally,
the loss includes a reduction of cost of produced coal revenue of $3.0
million pre-tax related to the refund of black lung excise taxes.
(3) Earnings for the fourth quarter 2001 include a charge of $6.9 million
pre-tax related to the settlement with the State of West Virginia
regarding Worker's Compensation liabilities incurred by independent
contractors, and $2.5 million pre-tax related to an increase in reserves
for a wrongful employee discharge suit.
(4) Earnings for the third quarter 2000 include a $12.0 million pre-tax
reduction to cost of produced coal revenue and $5.3 million pre-tax in
interest income related to the refund of black lung excise taxes.
(5) Earnings for the fourth quarter 2000 include a $3 million pretax reduction
to cost of produced coal revenue related to the refund of black lung excise
taxes. Additionally, fourth quarter 2000 results include a bad debt expense
charge of $7.1 million pre-tax related to the bankruptcy of a major steel
customer.
58
15. Subsequent Events
In December 2001, a substantial customer, Enron Corporation, filed for
bankruptcy protection. As a result, the Company increased its reserve to $4.5
million in December 2001 related to its exposure to this customer.
On December 15, 2001, an adverse judgment of $2.5 million was rendered
against the Company in a wrongful employee dismissal case that was tried in
Mingo County, West Virginia. At the time of trial, the Company had a loss
accrual of $500,000 for this contingent liability. After the verdict, the
Company increased its accrual to $3 million to cover the cost of the judgment
and expected pre-judgment interest. Post judgment motions are pending in the
trial court. A charge of $2.5 million is included in cost of produced coal
revenue for the fiscal year ended October 31, 2001.
On December 19, 2001, the Company agreed to make payments to a customer in
lieu of shipping coal contracted for 2002. The shipments of 672,132 tons were to
be made approximately ratably between January 2002 and December 2002. The price
per ton of $23.98 was below the assumed spot market price at that time. The
Company agreed to pay $2.5 million (monthly payments of $208,333 starting in
January 2002) to buy out this below-market contract. A charge of $2.5 million
was recognized in the two-month period ended Decemeber 31, 2001 to reflect that
agreement.
The West Virginia Workers Compensation Division filed suits in April 1998
against several coal companies, including several subsidiaries of Massey, for
delinquent workers' compensation premiums from the 1980s and early 1990s owed by
former contractors and licensees of such coal companies. In late 1999, the West
Virginia Workers Compensation Division agreed to dismiss these lawsuits. In
early 2001, the Affiliated Construction Trades Council filed a complaint in the
Circuit Court of McDowell County, West Virginia seeking to reinstate these
lawsuits. By opinion dated October 23, 2001, the court held that the cases could
be reinstated. In December 2001, in lieu of potentially reinstating the
lawsuits, the State of West Virginia and several coal operators, including
Massey, began discussions regarding a settlement of potential claims. In January
2002, Massey agreed to settle such claims for $6.9 million in exchange for a
release of all such claims. A charge of $6.9 million is included in cost of
produced coal revenue for the fiscal year ended October 31, 2001.
On January 2, 2002, WVDEP entered an order finding a pattern of violations
and suspending Green Valley's above-referenced refuse area permits for three
days. Green Valley obtained a stay of enforcement of the order pending appeal
and filed an appeal of the order.
On January 14, 2002, WVDEP entered an order finding a pattern of violations
and suspending operations on Marfork's refuse impoundment permit for fourteen
days. Marfork obtained a stay of enforcement of the order pending appeal and
filed an appeal of the order.
On August 1, 2002, the jury in the October 29, 1998 Harman case discussed
in Note 10 awarded the plaintiffs $50 million in compensatory and punitive
damages. Massey is vigorously pursuing post-judgement remedies, and various
motions filed in the trial court have been fully briefed and argued. Massey will
appeal to the West Virginia Supreme Court of Appeals, if necessary. In the
second quarter of 2002, the Company recorded a liability of $25.6 million, which
the Company believes is a fair estimate of the eventual payout related to this
matter.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no changes in, or disagreements with, accountants on
accounting and financial disclosure.
Part III
Item 10. Directors and Executive Officers of the Registrant.
Biographical information of Executive Officers is included in Item 4 of
this Form 10-K. Other information required by this item is included in the
Biographical section of the Election of Directors portion of the definitive
proxy statement pursuant to Regulation 14A, involving the election of directors,
which is incorporated herein by reference and will be filed with the Securities
and Exchange Commission (the "Commission") not later than 120 days after the
close of Massey's fiscal year ended October 31, 2001. The Company provides the
following additional biographical information:
Mr. Gardner is a sole practitioner in the private practice of law; and
Mr. Gee has been Chancellor of Vanderbilt University since 1998.
Item 11. Executive Compensation.
Information required by this item is included in the Organization and
Compensation Committee Report on Executive Compensation and Executive
Compensation and Other Information sections of the definitive proxy statement
pursuant to Regulation 14A, involving the election of directors, which is
incorporated herein by reference and will be filed not later than 120 days after
the close of Massey's fiscal year ended October 31, 2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item is included in the Stock Ownership
section of the Election of Directors portion of the definitive proxy statement
pursuant to Regulation 14A, involving the election of directors, which is
incorporated herein by reference and will be filed not later than 120 days after
the close of Massey's fiscal year ended October 31, 2001.
Item 13. Certain Relationships and Related Transactions.
Information required by this item is included in the Other Matters section of
the Election of Directors portion of the definitive proxy statement pursuant to
Regulation 14A, involving the election of directors, which is incorporated
herein by reference and will be filed not later than 120 days after the close of
Massey's fiscal year ended October 31, 2001.
58
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. Financial Reports:
Consolidated Statements of Earnings for the Fiscal Years Ended October
31, 2001, 2000 and 1999
Consolidated Balance Sheets at October 31, 2001 and October 31, 2000
Consolidated Statements of Cash Flows for the Fiscal Years Ended October
31, 2001, 2000 and 1999
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended October 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: Except for any schedules listed below, all
schedules have been omitted since the required information is not present
or not present in amounts sufficient to require submission of the schedule,
or because the information required is included in the consolidated
financial statements and notes thereto.
Schedule II - Valuation and Qualifying Accounts
3. Exhibits:
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of Massey, as amended [filed
as Exhibit 3.1 to Massey's annual report on Form 10-K for the fiscal
year ended October 31, 2000 and incorporated by reference]
3.2 Restated Bylaws (as amended effective January 22, 2002) of Massey
Energy Company 4.1 Fluor Corporation Dividend Reinvestment Plan (as
amended and restated June 30, 1995) [filed as Exhibit 4.2 to Fluor's
annual report on Form 10-K for the fiscal year ended October 31,
1995 and incorporated by reference]
4.2 Indenture dated as of February 18, 1997 between Fluor Corporation
and Banker's Trust Company, trustee [filed as Exhibit 4.1 to Form
8-K filed March 7, 1997 and incorporated by this reference].
10.1 Credit Agreement dated as of November 30, 2000, among Massey Energy
Company, as Borrower, A. T. Massey Coal Company, Inc., as Guarantor,
Citibank, N. A., as Administrative Agent, PNC Bank, National
Association, as Syndication Agent, First Union National Bank, as
Documentation Agent, and the lenders party thereto, for a maximum
principal amount at any one time outstanding not to exceed
$250,000,000 [filed as Exhibit 10.1 to Massey's annual report on
Form 10-K for the fiscal year ended October 31, 2001, filed with the
Securities and Exchange Commission on January 9, 2002, and
incorporated by reference]
10.2 Amendment to Credit Agreement dated as of November 27, 2001, among
Massey Energy Company, as Borrower, A. T. Massey Coal Company, Inc.,
as Guarantor, Citibank, N. A., as Administrative Agent, PNC Bank,
National Association, as Syndication Agent, First Union National
Bank, as Documentation Agent, and the lenders party thereto, for a
maximum principal amount at any one time outstanding not to exceed
$250,000,000 [filed as Exhibit 10.2 to Massey's annual report on
Form 10-K for the fiscal year ended October 31, 2001, filed with the
Securities and Exchange Commission on January 9, 2002, and
incorporated by reference]
10.3 Massey Energy Company 1999 Executive Performance Incentive Plan (as
amended and restated effective November 30, 2000) [filed as Exhibit
10.1 to Massey's annual report on Form 10-K for the fiscal year
ended October 31, 2000 and incorporated by reference]
10.4 Massey Executive Deferred Compensation Program (as amended and
restated effective November 30, 2000) [filed as Exhibit 10.2 to
Massey's annual report on Form 10-K for the fiscal year ended
October 31, 2000 and incorporated by reference]
59
10.5 Massey Energy Company Executive Physical Program [filed as Exhibit
10.3 to Massey's annual report on Form 10-K for the fiscal year
ended October 31, 2000 and incorporated by reference]
10.6 Massey Energy Company Directors' Life Insurance Summary [filed as
Exhibit 10.4 to Massey's annual report on Form 10-K for the fiscal
year ended October 31, 2000 and incorporated by reference]
10.7 Massey Energy Split Dollar Life Insurance Program Summary [filed as
Exhibit 10.5 to Massey's annual report on Form 10-K for the fiscal
year ended October 31, 2000 and incorporated by reference]
10.8 Massey Energy Company 1988 Executive Stock Plan (as amended and
restated effective November 30, 2000) [filed as Exhibit 10.6 to
Massey's annual report on Form 10-K for the fiscal year ended
October 31, 2000 and incorporated by reference]
60
10.9 Massey Energy Company Change of Control Compensation Plan (as
amended and restated effective November 30, 2000) [filed as Exhibit
10.7 to Massey's annual report on Form 10-K for the fiscal year
ended October 31, 2000 and incorporated by reference]
10.10 Massey Energy Company 1982 Shadow Stock Plan [filed as Exhibit 10.8
to Massey's annual report on Form 10-K for the fiscal year ended
October 31, 2000 and incorporated by reference]
10.11 Massey Energy Company 1997 Stock Appreciation Rights Plan [filed as
Exhibit 10.9 to Massey's annual report on Form 10-K for the fiscal
year ended October 31, 2000 and incorporated by reference]
10.12 A. T. Massey Coal Company, Inc. Supplemental Benefit Plan [filed as
Exhibit 10.10 to Massey's annual report on Form 10-K for the fiscal
year ended October 31, 2000 and incorporated by reference]
10.13 A. T. Massey Coal Company, Inc. Executive Deferred Compensation Plan
[filed as Exhibit 10.11 to Massey's annual report on Form 10-K for
the fiscal year ended October 31, 2000 and incorporated by
reference]
10.14 Massey Energy Company 1997 Restricted Stock Plan for Non-Employee
Directors (as amended and restated effective November 30, 2000)
[filed as Exhibit 10.12 to Massey's annual report on Form 10-K for
the fiscal year ended October 31, 2000 and incorporated by
reference]
10.15 Massey Energy Company 1996 Executive Stock Plan (as amended and
restated effective November 30, 2000) [filed as Exhibit 10.13 to
Massey's annual report on Form 10-K for the fiscal year ended
October 31, 2000 and incorporated by reference]
10.16 Massey Energy Company Stock Plan for Non-Employee Directors (as
amended and restated effective November 30, 2000) [filed as Exhibit
10.14 to Massey's annual report on Form 10-K for the fiscal year
ended October 31, 2000 and incorporated by reference]
10.17 Massey Energy Company Deferred Directors' Fees Program [filed as
Exhibit 10.15 to Massey's annual report on Form 10-K for the fiscal
year ended October 31, 2000 and incorporated by reference]
10.18 Employment Agreement between Massey Energy Company, A.T. Massey Coal
Company, Inc. and Don L. Blankenship dated as of November 1, 2001
[filed as Exhibit 10.18 to Massey's annual report on Form 10-K for
the fiscal year ended October 31, 2001, filed with the Securities
and Exchange Commission on January 9, 2002, and incorporated by
reference]
10.19 Consulting Agreement between James L. Gardner and A. T. Massey Coal
Company, Inc. dated as of February 23, 2000 [filed as Exhibit 10.18
to Massey's annual report on Form 10-K for the fiscal year ended
October 31, 2000 and incorporated by reference]
10.20 Amendment to Consulting Agreement between James L. Gardner and A. T.
Massey Coal Company dated February 23, 2000 [filed as Exhibit 10.19
to Massey's annual report on Form 10-K for the fiscal year ended
October 31, 2000 and incorporated by reference]
10.21 Special Successor and Development Retention Program between Fluor
Corporation and Don L. Blankenship dated as of September 1998 [filed
as Exhibit 10.21 to Fluor's annual report on Form 10-K for the
fiscal year ended October 31, 1998 and incorporated by this
reference]
10.22 Distribution Agreement between Fluor Corporation and Massey Energy
Company dated as of November 30, 2000 [filed as Exhibit 10.1 to
Massey's current report on Form 8-K filed December 15, 2000 and
incorporated by this reference]
10.23 Tax Sharing Agreement between Fluor Corporation, Massey Energy
Company and A. T. Massey Coal Company, Inc. dated as of November 30,
2000 [filed as Exhibit 10.2 to Massey's current report on Form 8-K
filed December 15, 2000 and incorporated by this reference]
10.24 First Amendment to the A.T. Massey Coal Company, Inc. Executive
Deferred Compensation Plan [filed as Exhibit 10.23 to Massey's
annual report on Form 10-K for the fiscal year ended October 31,
2000 and incorporated by reference]
21 Massey Energy Company Subsidiaries [filed as Exhibit 21 to Massey's
annual report on Form 10-K for the fiscal year ended October 31,
2001, filed with the Securities and Exchange Commission on January
9, 2002, and incorporated by reference]
23 Consent of Independent Auditors
24 Manually signed Powers of Attorney executed by Massey directors
[filed as Exhibit 24 to Massey's annual report on Form 10-K for the
fiscal year ended October 31, 2001, filed with the Securities and
Exchange Commission on January 9, 2002, and incorporated by
reference]
61
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:
Current Report on Form 8-K filed November 5, 2001 announcing
change of Massey's fiscal year end from October 31 to December 31.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Amendment No. 2 to be
signed on its behalf by the undersigned, thereunto duly authorized.
MASSEY ENERGY COMPANY
March 31, 2003
By: /s/ K.J. STOCKEL
-------------------------------
K. J. Stockel
Senior Vice President and
Chief Financial Officer
62
CERTIFICATIONS
I, Kenneth J. Stockel, certify that:
1. I have reviewed this amended and restated annual report on Form 10-K/A
of Massey Energy Company;
2. Based on my knowledge, this amended and restated annual report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this amended and restated annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended and restated annual report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this amended and restated annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this amended and restated annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this amended and restated annual report
(the "Evaluation Date"); and
c) presented in this amended and restated annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
amended and restated annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ K. J. Stockel
--------------------------
K. J. Stockel
Senior Vice President and
Chief Financial Officer
63
CERTIFICATIONS
I, Don L. Blankenship, certify that:
1. I have reviewed this amended and restated annual report on Form 10-K/A
of Massey Energy Company;
2. Based on my knowledge, this amended and restated annual report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this amended and restated annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amended and restated annual report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods
presented in this amended and restated annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this amended and restated annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this amended and restated annual report
(the "Evaluation Date"); and
c) presented in this amended and restated annual report our
conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
amended and restated annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ D. L. Blankenship
-----------------------------------
D. L. Blankenship
Chairman, Chief Executive Officer
and President
64
MASSEY ENERGY COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands of Dollars)
Balance at Charged to
Beginning Costs and Balance at
Description of Year Expenses Deductions (1) Other (2) End of Year
- ------------------------------------------------------ ----------- ----------- -------------- --------- ------------
YEAR ENDED OCTOBER 31, 2001
Reserves deducted from asset accounts:
Allowance for accounts and notes receivable $ 12,899 $ (1,527) $ (24) $ (1,500) $ 9,848
YEAR ENDED OCTOBER 31, 2000
Reserves deducted from asset accounts:
Allowance for accounts and notes receivable 6,587 6,333 --- (21) 12,899
YEAR ENDED OCTOBER 31, 1999
Reserves deducted from asset accounts:
Allowance for accounts and notes receivable 6,903 (204) (21) (91) 6,587
(1) Reserves utilized, unless otherwise indicated.
(2) Reclassifications, unless otherwise indicated.
65