-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Niy+O7ry1bDdkw2VG2X/lnG3ihmyw11sbJWFwiKCWXDDC0ulJfBDDBjur/fcybmn dFVYOXiBVOeua3Eiu9yxfQ== 0000916641-01-501138.txt : 20010917 0000916641-01-501138.hdr.sgml : 20010917 ACCESSION NUMBER: 0000916641-01-501138 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20010731 FILED AS OF DATE: 20010914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MASSEY ENERGY CO CENTRAL INDEX KEY: 0000037748 STANDARD INDUSTRIAL CLASSIFICATION: BITUMINOUS COAL & LIGNITE MINING [1220] IRS NUMBER: 950740960 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-07775 FILM NUMBER: 1737126 BUSINESS ADDRESS: STREET 1: 4 NORTH 4TH STREET CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 9493492000 MAIL ADDRESS: STREET 1: 4 NORTH 4TH STREET CITY: RICHMOND STATE: VA ZIP: 23219 FORMER COMPANY: FORMER CONFORMED NAME: FLUOR CORP LTD DATE OF NAME CHANGE: 19710624 FORMER COMPANY: FORMER CONFORMED NAME: FLUOR CORP/DE/ DATE OF NAME CHANGE: 19920703 10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________to__________________ Commission File Number: 1-7775 MASSEY ENERGY COMPANY - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) Delaware 95-0740960 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification Number) 4 North 4th Street, Richmond, Virginia 23219 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (804) 788-1800 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[_] As of August 31, 2001 there were 74,400,085 shares of common stock, $0.625 par value, outstanding. 1 MASSEY ENERGY COMPANY FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JULY 31, 2001
TABLE OF CONTENTS PAGE - ------------------------------------------------------------------------------------------------------------------- Part I: Financial Information 3 Item 1. Condensed Consolidated Financial Statements 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Discussions About Market Risk 12 Part II: Other Information 13 Item 1. Legal Proceedings 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
2 PART I: FINANCIAL INFORMATION ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MASSEY ENERGY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED
Three Months Ended Nine Months Ended July 31, July 31, ----------------------------- --------------------------- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 2001 2000 2001 2000 ---- ---- ---- ---- Net sales $ 301,792 $ 272,847 $ 882,797 $ 792,461 Other revenue 9,744 20,523 26,856 51,603 --------- ---------- ---------- --------- Total revenue 311,536 293,370 909,653 844,064 Costs and expenses Cost of sales 265,770 210,118 745,041 600,456 Depreciation, depletion and amortization 46,969 40,364 134,541 126,043 Selling, general and administrative 4,535 5,165 23,852 21,944 --------- ---------- ---------- --------- Total costs and expenses 317,274 255,647 903,434 748,443 (Loss) earnings before interest and taxes (5,738) 37,723 6,219 95,621 Interest income 727 10,752 7,223 19,768 Interest expense 8,611 76 26,031 192 --------- ---------- ---------- --------- (Loss) earnings before taxes (13,622) 48,399 (12,589) 115,197 Income tax (benefit) expense (4,228) 16,034 (3,924) 38,122 --------- ---------- ---------- --------- Net (loss) earnings $ (9,394) $ 32,365 $ (8,665) $ 77,075 ========= ========== ========== ========= (Loss) earnings per share (Note 7) Basic $ (0.13) $ 0.44 $ (0.12) $ 1.05 ========= ========== ========== ========= Diluted $ (0.13) $ 0.44 $ (0.12) $ 1.05 ========= ========== ========== ========= Shares used to calculate (loss) earnings per share (Note 7) Basic 73,951 73,469 73,806 73,469 ========= ========== ========== ========= Diluted 73,951 73,469 73,806 73,472 ========= ========== ========== ========= Dividends Per Share $ 0.04 $ - $ 0.12 $ - ========= ========== ========== =========
See Notes to Condensed Consolidated Financial Statements. 3 MASSEY ENERGY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS July 31, 2001 and October 31, 2000 UNAUDITED
JULY 31, OCTOBER 31, $ IN THOUSANDS 2001 2000 * - ---------------------------------------------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 3,004 $ 6,929 Trade and other accounts receivable 181,458 215,574 Inventories 114,822 104,132 Deferred taxes 10,255 8,398 Prepaid expenses and other 76,965 67,813 -------------------- ---------------------- Total current assets 386,504 402,846 Net Property, Plant and Equipment 1,579,091 1,559,426 Other Noncurrent Assets Pension assets 77,030 67,740 Other 116,588 131,118 -------------------- ---------------------- Total other noncurrent assets 193,618 198,858 -------------------- ---------------------- Total assets $ 2,159,213 $ 2,161,130 ==================== ======================
* Amounts at October 31, 2000 have been derived from audited financial statements. (Continued On Next Page) 4 MASSEY ENERGY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS July 31, 2001 and October 31, 2000 UNAUDITED
JULY 31, OCTOBER 31, $ IN THOUSANDS 2001 2000 * - ----------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable, principally trade, and bank overdrafts $ 151,729 $ 153,457 Short-term debt 191,204 - Payroll and employee benefits 32,338 30,784 Income taxes payable 627 12,222 Other current liabilities 63,345 78,420 ---------------------- --------------------- Total current liabilities 439,243 274,883 Long-term debt 300,000 - Noncurrent liabilities Deferred taxes 262,286 254,022 Other noncurrent liabilities 292,678 257,607 ---------------------- --------------------- Total noncurrent liabilities 554,964 511,629 Shareholders' Equity Capital Stock Preferred - authorized 20,000,000 shares without par value; none issued - - Common - authorized 150,000,000 shares of $0.625 par value; issued and outstanding - 74,390,229 shares 46,494 - Additional capital 10,443 - Retained earnings 813,028 - Unamortized executive stock plan expense (4,959) - Net investment by Fluor Corporation - 1,653,682 Due from Fluor Corporation - (279,064) ---------------------- --------------------- Total shareholders' equity 865,006 1,374,618 ---------------------- --------------------- Total liabilities and shareholders' equity $ 2,159,213 $ 2,161,130 ====================== =====================
* Amounts at October 31, 2000 have been derived from audited financial statements. See Notes to Condensed Consolidated Financial Statements. 5 MASSEY ENERGY COMPANY CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended July 31, 2001 and 2000 UNAUDITED
$ IN THOUSANDS 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) earnings $ (8,665) $ 77,075 Adjustments to reconcile net (loss) earnings to cash utilized by operating activities: Depreciation, depletion and amortization 134,541 126,043 Deferred taxes 6,795 22,522 Changes in operating assets and liabilities, excluding effects of business acquisitions/dispositions 39,222 (121,706) Other, net 1,874 (26,108) ------------------- ----------------- Cash provided by operating activities 173,767 77,826 ------------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (165,765) (146,832) Cash from sale of interest in Appalachian Synfuel, LLC 3,600 - Proceeds from sale of property, plant and equipment 313 29,361 ------------------- ----------------- Cash utilized by investing activities (161,852) (117,471) ------------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease in short-term debt, net (87,025) - Decrease in amount due from Fluor Corporation 67,554 25,495 Equity contributions from Fluor Corporation 2,476 11,164 Cash dividends paid (8,788) - Stock options exercised 8,839 - Other, net 1,104 - ------------------- ----------------- Cash (utilized) provided by financing activities (15,840) 36,659 ------------------- ----------------- Decrease in cash and cash equivalents (3,925) (2,986) Cash and cash equivalents at beginning of period 6,929 8,051 ------------------- ----------------- Cash and cash equivalents at end of period $ 3,004 $ 5,065 =================== =================
See Notes to Condensed Consolidated Financial Statements. 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) The condensed consolidated financial statements do not include footnotes and certain financial information normally presented annually under accounting principles generally accepted in the United States and, therefore, should be read in conjunction with Massey Energy Company's ("Massey" or "the Company") Annual Report on Form 10-K for the fiscal year ended October 31, 2000. Accounting measurements at interim dates inherently involve greater reliance on estimates than at year-end. The results of operations for the three months and nine months ended July 31, 2001 are not necessarily indicative of results that can be expected for the full year. The condensed consolidated financial statements included herein are unaudited; however, they contain all adjustments (consisting of normal recurring accruals) which, in the opinion of the Company, are necessary to present fairly its consolidated financial position at July 31, 2001, its consolidated results of operations for the three months and nine months ended July 31, 2001 and 2000, and its consolidated cash flows for the nine months ended July 31, 2001 and 2000. Certain 2000 amounts have been reclassified to conform with the 2001 presentation. (2) On November 30, 2000, Fluor Corporation ("Fluor") completed a reverse spin- off, which divided it into two separate publicly-traded corporations. As a result of the reverse spin-off (the "Spin-Off"), Fluor separated into (i) the spun-off corporation, "new" Fluor Corporation ("New Fluor"), which owns all of Fluor's then existing businesses except for the coal-related business conducted by A. T. Massey Coal Company, Inc. ("A.T. Massey"), and (ii) Fluor Corporation, subsequently renamed Massey Energy Company, which owns the coal-related business. Further discussion of the Spin-Off may be found in Massey's Annual Report on Form 10-K for the fiscal year ended October 31, 2000 as filed with the Securities and Exchange Commission. Immediately after the Spin-Off, Massey had 73,468,707 shares of $0.625 par value common stock outstanding. In connection with the Spin-Off, A. T. Massey became the sole direct, and wholly owned subsidiary of Massey. A. T. Massey now represents the sole operating subsidiary of Massey, as Massey has no separate independent operations. Due to the relative significance of the businesses transferred to New Fluor following the Spin-Off, New Fluor has been treated as the "accounting successor" for financial reporting purposes and the Company has been treated by New Fluor as a discontinued operation despite the legal form of separation resulting from the Spin-Off. As a result of the Spin-Off, the following occurred which affected Massey's ongoing operations: . Massey no longer invests in Fluor commercial paper; . Massey no longer loans amounts in excess of operating and capital needs to Fluor and the amounts due from Fluor were repaid as part of the Spin-Off; . Fluor's previously issued $300 million of 6.95 percent Senior Notes due March 1, 2007, with interest payable semi-annually on March 1 and September 1 of each year, became the obligation of Massey; and . Massey issued $275 million of its own commercial paper and utilized $3.5 million of cash to refund the $278.5 million of Fluor commercial paper assumed as a result of the Spin-Off. Massey's equity structure was also impacted as a result of the Spin-Off. As noted above, Massey assumed from Fluor $300 million of 6.95 percent Senior Notes, $278.5 million of Fluor commercial paper, other equity contributions from Fluor, and assumed Fluor's common stock equity structure. These Spin- Off occurrences, in addition to the net income for the nine months ended July 31, 2001, dividends paid, and options exercised, resulted in a change in shareholders' equity from $1,374.6 million at October 31, 2000 to $865.0 million at July 31, 2001, a net reduction of $509.6 million. 7 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) (3) Effective November 1, 2000, the Company adopted Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities". The Company has determined that the adoption of these accounting standards and subsequent implementation guidance did not have a material impact on the Company's financial statements. (4) In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"). SFAS 143 is effective for the Company beginning in fiscal year 2003. The Company is currently evaluating the impact that SFAS 143 will have on its financial condition and results of operations. (5) Inventories are comprised of:
July 31, October 31, $ in thousands 2001 2000 ------------------------------------------------------------------------------------------------------------- Coal $ 94,208 $ 82,636 Other 20,614 21,496 ----------- ----------- $ 114,822 $ 104,132 =========== ===========
(6) Net Property, Plant and Equipment is comprised of:
July 31, October 31, $ in thousands 2001 2000 ------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment, at cost $ 2,633,664 $ 2,517,052 Accumulated depreciation, depletion and amortization (1,054,573) (957,626) ------------ ------------- $ 1,579,091 $ 1,559,426 ============ =============
(7) The number of shares used to calculate basic earnings per share for the three months and nine months ended July 31, 2000 is based on the number of Massey shares outstanding immediately following the Spin-Off. The number of shares used to calculate basic earnings per share for all other periods presented is based on the weighted average outstanding shares of Massey Energy during the respective periods. The number of shares used to calculate diluted earnings per share is based on the number of shares used to calculate basic earnings per share plus the dilutive effect of stock options and other stock-based instruments held by Massey employees each period. In accordance with accounting principles generally accepted in the United States, the effect of dilutive securities was excluded from the calculation of the diluted loss per common share in the three months and nine months ended July 31, 2001 as such inclusion would result in antidilution. (8) During the third fiscal quarter of 2001, management decided to move a longwall to better mining conditions in another mine location by the end of October 2001. As a result, unamortized longwall panel development costs of $7.6 million as of July 31, 2001 were determined to be impaired. These development costs were written off at the end of the third quarter. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis is provided to increase understanding of, and should be read in conjunction with, the Condensed Consolidated Financial Statements and accompanying notes and the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000. FORWARD-LOOKING INFORMATION - --------------------------- From time to time, the Company makes certain comments and disclosures in reports and statements, including this report or statements made by its officers or directors which may be forward-looking in nature. Examples include statements related to Company growth, the adequacy of funds to service debt and the Company's opinions about trends and factors which may impact future operating results. These forward-looking statements could also involve, among other things, statements regarding the Company's intent, belief or expectation with respect to (i) the Company's results of operations and financial condition, (ii) the consummation of acquisition, disposition or financing transactions and the effect thereof on the Company's business, and (iii) the Company's plans and objectives for future operations and expansion or consolidation. Any forward-looking statements are subject to the risks and uncertainties that could cause actual results of operations, financial condition, cost reductions, acquisitions, dispositions, financing transactions, operations, expansion, consolidation and other events to differ materially from those expressed or implied in such forward-looking statements. Any forward-looking statements are also subject to a number of assumptions regarding, among other things, future economic, competitive and market conditions generally. These assumptions would be based on facts and conditions as they exist at the time such statements are made as well as predictions as to future facts and conditions, the accurate prediction of which may be difficult and involve the assessment of events beyond the Company's control. As a result, the reader is cautioned not to rely on these forward-looking statements. The Company wishes to caution readers that forward-looking statements, including disclosures, which use words such as the Company "believes," "anticipates," "expects," "estimates" and similar statements, are subject to certain risks and uncertainties, which could cause actual results of operations to differ materially from expectations. Any forward-looking statements should be considered in context with the various disclosures made by the Company about its businesses, including without limitation the risk factors more specifically described in Item 1. Business, under the heading "Business Risks", in the Company's Annual Report on Form 10-K for its fiscal year ended October 31, 2000. Such filings are available publicly and upon request from Massey's Investor Relations Department: (866) 814-6512. The Company disclaims any intent or obligation to update its forward-looking statements. RESULTS OF OPERATIONS - --------------------- Three months ended July 31, 2001 compared with the three months ended July 31, - ------------------------------------------------------------------------------ 2000. - ---- In the third fiscal quarter of 2001, net sales increased 10.6 percent to $301.8 million in 2001 compared with $272.8 million for the same period in 2000. Two factors that impacted net sales during the third quarter 2001 were: . The volume of tons sold increased 4.8 percent from 10.2 million tons to 10.7 million tons consisting of an increase of utility and industrial tons sold of 16 and 28 percent, respectively, and a decrease of metallurgical tons sold of 17 percent. . The average per ton sales price for coal increased 5.4 percent from $26.69 per ton for the three months ended July 31, 2000 to $28.12 per ton for the same period in 2001. The market for utility coal continued to improve during the third quarter of fiscal year 2001 as spot market prices of Central Appalachian coal have increased to 20-year highs. However, most of the Massey tonnage sold in the third quarter was committed prior to the upturn in the market. While realized prices for utility sales in the third fiscal quarter continued to reflect a bottoming of the market prior to the recent market upturn, the Company is starting to benefit from the improved market conditions. Other revenue, which consists of royalties, rentals, miscellaneous income and gains on the sale of non-strategic assets, decreased 53 percent to $9.7 million for the third quarter of 2001 compared with $20.5 million for the same period in 2000. The decline was 9 primarily due to a decrease in income from dispositions of non-strategic mineral reserves, which generated $10.6 million in 2000 compared to $1.1 million for 2001. As part of its management of coal reserves, Massey regularly sells reserves located in less strategic areas or exchanges them for reserves located in more synergistic locations. Cost of sales increased 26 percent to $265.8 million for the third quarter of 2001 from $210.1 million in the same period in 2000. This was primarily due to the 4.8 percent increase in tons sold. Cost of sales on a per ton basis increased by 21 percent in the third quarter of 2001 compared with the same period in 2000 as operating difficulties at several of Massey's longwall mines continued to negatively impact production and costs during the third quarter. In addition, heavy rains in Central Appalachia during July increased employee absenteeism and disrupted loading operations and rail service, delaying coal shipping. The Company's labor costs were higher in the quarter due to the extremely tight labor market in Central Appalachia and decreases in productivity related to the training of new miners. Cost of sales for the third quarter of 2001 included a $7.6 million pre-tax write-off of unamortized panel development costs at the Jerry Fork longwall mine. The Company decided late in the third quarter to move this longwall unit to Sidney's Rockhouse Mine in late October to take advantage of better mining conditions. The increase in cost of sales for the third quarter of fiscal year 2001 was partially offset by a $3.0 million pre-tax refund related to black lung excise taxes paid on coal export sales tonnage. During the third fiscal quarter of 2000 a $12.0 million pre-tax refund for black lung excise tax was recorded, reducing third quarter 2000 cost of sales. Black lung excise taxes on exported coal were determined to be unconstitutional by a 1998 federal district court decision. Depreciation, depletion and amortization increased by 16 percent to $47.0 million in the third quarter of 2001 compared to $40.4 million in 2000. The increase of $6.6 million was primarily due to capital expenditures made in recent years. Selling, general and administrative expenses were $4.5 million for the third quarter of 2001 compared to $5.2 million for 2000. The decrease was attributed to decreases in accruals for long-term executive stock-based compensation plans as a result of decreases in the Massey stock price during the quarter, partially offset by additions in the administrative workforce due to the increased workload that is part of running a stand-alone publicly traded company. Earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA"), was $41.2 million for the three months ended July 31, 2001 compared to $78.1 million for the same period in 2000. Interest income decreased to $0.7 million for the three months ended July 31, 2001 compared with $10.8 million for the same period in 2000. Interest income for the third quarter of fiscal year 2000 reflected $5.3 million of interest receivable on the black lung excise tax refund as discussed above and income from an intercompany receivable from Fluor Corporation, which was only in place in 2000 until the Spin-Off. Interest expense increased to $8.6 million for the three months ended July 31, 2001 compared with $0.1 million for the same period in 2000. The increase was primarily due to the addition of the 6.95 percent Senior Notes and commercial paper borrowings subsequent to the Spin-Off. Income tax benefit was $4.2 million for the third quarter 2001 compared with income tax expense of $16.0 million for the same period in 2000. This primarily reflects the decrease in earnings before interest and taxes in the third quarter of 2001 compared to the income for 2000. Nine months ended July 31, 2001 compared with the nine months ended July 31, - ---------------------------------------------------------------------------- 2000. - ---- For the nine month period ended July 31, 2001, net sales increased 11.4 percent to $882.8 million compared with $792.5 million for the same period in 2000. Two factors that impacted net sales during the first nine months of 2001 were: . The volume of tons sold increased 9.3 percent from 29.7 million tons to 32.4 million tons consisting of an increase of utility and industrial tons sold of 16 and 19 percent, respectively, and a decrease of metallurgical tons sold of 4 percent. . The average per ton sales price for coal increased 2.0 percent from $26.66 per ton for the nine months ended July 31, 2000 to $27.19 per ton for the same period in 2001. The market for utility coal has improved during the first nine months of 2001 as spot market prices of Central Appalachian coal increased to a 20 year high. Most of the Massey tonnage sold in the first nine months was committed prior to the upturn in the 10 market, although prices in the third quarter began to improve with market conditions. Realized prices for utility sales in the first six months of 2001 reflect a bottoming of the market prior to the recent market upturn. Other revenue, which consists of royalties, rentals, miscellaneous income and gains on the sale of non-strategic assets, decreased 48 percent to $26.9 million for the nine month period ended July 31, 2001 compared with $51.6 million for the same period in 2000. The decline was primarily due to a decrease in income from dispositions of non-strategic mineral reserves, which generated $26.5 million in 2000, compared to $1.1 million for 2001. Cost of sales increased 24 percent to $745.0 million for the nine months ended July 31, 2001 from $600.5 million in the same period in 2000. This was primarily due to the 9.3 percent increase in tons sold. Cost of sales on a per ton basis increased by 14 percent for the nine month period ended July 31, 2001 compared with the same period in 2000. Operational problems continued to impact production and costs, and heavy rains in Central Appalachia in July increased employee absenteeism and disrupted loading operations and rail service, delaying coal shipping. Operating difficulties and problematic geologic conditions were encountered at several longwall mines and during the expansion of two large surface mines. Two new longwall mines, which started in January 2001, experienced normal start-up problems. One longwall mine encountered unfavorable mining conditions while mining at an interim location during November and December. The Ellis Eagle longwall mine experienced flooding that caused significant disruption to coal production during April and May. The flooding caused reduced shipments from both the Marfork and Goals preparation plants. The two surface mines experienced higher than expected overburden ratios in the first and second quarters. Increases in operating costs related to the Martin County Coal slurry spill and the idling of the Martin County Coal preparation plant also negatively impacted cost of sales. Cost of sales for the third quarter of 2001 included a $7.6 million pre-tax write-off of unamortized panel development costs at the Jerry Fork longwall mine. The Company decided late in the third quarter to move this longwall unit to Sidney's Rockhouse Mine in late October to take advantage of better mining conditions. The increase in cost of sales for the first nine months of 2001 was partially offset by a $9.5 million pre-tax refund related to black lung excise taxes on coal export sales tonnage. Black lung excise taxes on exported coal were determined to be unconstitutional by a 1998 federal district court decision. During the second quarter, the Internal Revenue Service substantially completed its audit of the Company's requested refund of black lung excise tax payments. Depreciation, depletion and amortization increased by 7 percent to $134.5 million for the nine month period ended July 31, 2001, compared to $126.0 million in 2000. The increase of $8.5 million was primarily due to capital expenditures made in recent years. Selling, general and administrative expenses were $23.9 million for 2001, an increase from $21.9 million for 2000. The increase was attributed to additions in the administrative workforce due to the increased workload that is part of running a stand-alone publicly traded company and increased accruals for long-term executive stock-based compensation plans. Earnings before interest, taxes, depreciation, depletion and amortization ("EBITDA"), was a positive $140.8 million for the nine months ended July 31, 2001 compared to $221.7 million of the same period in 2000. Interest income decreased to $7.2 million for the nine months ended July 31, 2001 compared with $19.8 million for the same period in 2000. This decrease was primarily due to an intercompany receivable from Fluor Corporation, which was outstanding for one month in the nine months of fiscal 2001 compared to nine months in 2000. In the second quarter of 2001, $3.2 million was accrued for interest due on the black lung excise tax refund as noted above, while in the third fiscal quarter of 2000, $5.3 million was accrued for interest on the black lung excise tax refund. Interest expense increased to $26.0 million for the nine months ended July 31, 2001 compared with $0.2 million for the same period in 2000. The increase was primarily due to the addition of the 6.95 percent Senior Notes and commercial paper borrowings subsequent to the Spin-Off. Income tax benefit was $3.9 million for the nine month period ended July 31, 2001 compared with income tax expense of $38.1 million for the same period in 2000. This primarily reflects the decrease in earnings before taxes in the first three quarters of 2001 compared to the income for 2000. 11 LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At July 31, 2001, the Company's available liquidity was $204 million, including cash and cash equivalents of $3 million and $200.8 million from the Company's commercial paper program. Massey had $191.2 million of short-term debt as of July 31, 2001 consisting of $183.5 million of consolidated commercial paper (outstanding commercial paper of $198.8 million net of discount offset by $15.3 million of Massey commercial paper purchased by various Massey subsidiaries), and a $7.7 million promissory note payable November 1, 2001 related to a strategic property purchase during the third quarter. Massey has $150 million 364-day and $250 million 3-year revolving credit facilities that serve to provide liquidity backstop to Massey's commercial paper program and are also available to meet the Company's ongoing liquidity needs. The total debt-to-book capitalization ratio was 36.2 percent at July 31, 2001. The cash flow provided by operating activities was $173.8 million in the first nine months of 2001 and $77.8 million for the same period in 2000. Cash provided by operating activities reflects net earnings adjusted for non-cash charges and changes in working capital requirements. Net cash utilized by investing activities was $161.9 million for the first nine months in 2001, and $117.5 million for the same period in 2000. The cash used in investing activities reflects capital expenditures in the amount of $165.8 million and $146.8 million for the nine months ended July 31, 2001 and 2000, respectively. These capital expenditures are for replacement of mining equipment, the expansion of mining capacity and projects to improve the efficiency of mining operations. Financing activities primarily reflect changes in amounts due from Fluor Corporation and additional capital investments from Fluor prior to the Spin-Off. In addition to the cash spent on capital expenditures, during the first nine months of 2001, the Company leased, through operating leases, $79.4 million of longwall and surface mining equipment. OUTLOOK - ------- Operational, expansion and labor shortage issues are expected to continue to negatively impact the Company's financial results for the fourth quarter. The Company expects that record spot coal prices and increasing demand for coal will positively impact sales in 2002 and 2003 and has decided to increase its capital spending, both in the second half of fiscal 2001 and 2002, to take advantage of opportunities to expand production capacity, reduce production cost and improve processing and shipping capability. ITEM 3: QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK Massey's interest expense is sensitive to changes in the general level of interest rates in the United States. At July 31, 2001, Massey had outstanding $300 million aggregate principal amount of debt under fixed-rate instruments; however, the Company's primary exposure to market risk for changes in interest rates relates to its commercial paper program. At July 31, 2001, Massey had $199.2 million of aggregate principal amount of commercial paper outstanding ($198.8 million net of discount). At July 31, 2001 Massey's commercial paper bore interest at an average rate of 4.05 percent. Based on the commercial paper balance outstanding at July 31, 2001, a 100 basis point increase in the average issuance rate for Massey's commercial paper would increase Massey's annual interest expense by approximately $2.0 million. Almost all of Massey's transactions are denominated in U.S. dollars, and, as a result, it does not have material exposure to currency exchange-rate risks. Massey has not engaged in any interest rate, foreign currency exchange rate or commodity price-hedging transactions. 12 PART II: OTHER INFORMATION Item 1. Legal Proceedings The following describes material developments in legal proceedings affecting the Company, as previously described in Part II, Item 1 in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2001, as they relate to the fiscal quarter ended July 31, 2001. a) With respect to the Martin County Coal impoundment discharge described in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000, and further discussed in the Company's Quarterly Reports on Form 10-Q for the first and second quarters of fiscal year 2001, Martin County Coal is continuing to negotiate with the applicable agencies for refuse disposal areas that would allow for a long-term continuation of operations of Martin County Coal's preparation plant. As of July 31, 2001, cleanup costs of approximately $36.9 million were expended, $27.1 million of which have been paid or reimbursed by insurance companies to date. Massey continues to seek insurance reimbursement of any and all covered costs, the majority of which are recorded as a receivable in the Company's financial statements. On June 26, 2001, the West Virginia Department of Environmental Protection ("WVDEP") filed a civil action against Martin County Coal in the Wayne County, West Virginia Circuit Court to redress alleged injury to, destruction or loss of natural resources in the State of West Virginia and alleged violations of law resulting from the impoundment discharge. b) In June 1998, Harman Mining Corporation ("Harman") filed a breach of contract action against Wellmore Coal Corporation ("Wellmore"), a former Massey subsidiary, in Buchanan County, Virginia Circuit Court, described in the Company's Form 10-K for the fiscal year ended October 31, 2000. On August 24, 2000, Harman received a jury verdict against Wellmore assessing $6 million in damages. Massey's subsidiary, Knox Creek Coal Corporation, has assumed the defense of this action under the terms of the stock purchase agreement by which it sold the stock of Wellmore and, on August 6, 2001 filed a petition for appeal of the adverse determination on liability and damages to the Supreme Court of Virginia. Additionally, Harman and its sole shareholder, Hugh Caperton, filed a separate action against Massey and certain subsidiaries in Boone County, West Virginia Circuit Court, alleging that Massey and its subsidiaries tortiously interfered with Harman's contract with Wellmore. This action is described in the Company's Form 10-K for the fiscal year ended October 31, 2000. Massey is defending this action vigorously and believes that it has numerous valid defenses to the claims. This action is set for trial beginning February 19, 2002. c) On April 28, 2000, WVDEP issued two show cause orders to Marfork Coal Company, Inc. ("Marfork"). The orders alleged patterns of violations relating, respectively, to water quality and air quality at Marfork's coal preparation plant. On December 20, 2000, WVDEP issued Marfork a third show cause order, relating to alleged water quality violations at the coal preparation plant. In lieu of a show cause hearing, Marfork entered into a consent agreement with WVDEP in April 2001. The agreement required Marfork to undertake remedial actions and to expend $100,000 on community improvement projects approved by WVDEP. d) WVDEP has also issued orders to (i) Marfork on June 7, 2001, ordering it to show cause why the permit for its refuse impoundment should not be suspended or revoked because of an alleged pattern of violations relating to water quality, (ii) Green Valley Coal Company ("Green Valley") on August 21, 2001,ordering it to show cause why the permit for a refuse disposal area should not be suspended or revoked in response to an alleged pattern of violations relating to water quality, and (iii) Independence Coal Company, Inc. ("Independence") on August 24, 2001, ordering it to show cause why the permit for its preparation plant should not be suspended or revoked because of an alleged pattern of violations relating to water quality, waste disposal and refuse placement. The hearing related to Marfork will be scheduled for late September 2001. Green Valley and Independence each intend to timely request a hearing and each hearing should be scheduled within thirty (30) days after such request. In the event of an adverse determination, the affected permits could be suspended or revoked. If a permit is revoked, Massey and its subsidiaries could be prohibited from receiving additional permits. The companies intend to vigorously defend these enforcement actions. 13 Item 5. Other Information a) The Company's West Virginia and Kentucky operations were affected by flooding that occurred in July in Central Appalachia. The flooding disrupted coal production and shipments. This event adversely impacted the Company's efforts to mitigate the previous force majeure events resulting from the slurry spill at Martin County and the longwall flooding at Marfork's Ellis Eagle mine. Certain customers have complained about shortfalls in coal shipments. The Company has taken a number of steps to deal with these complaints, including starting up new mines and purchasing additional coal trucks to expedite shipping. Several customers have agreed to defer tonnage into calendar year 2002. The Company continues to seek to resolve any other customer complaints through similar arrangements. b) On October 20, 1999, the United States District Court for the Southern District of West Virginia ("District Court") issued an injunction against the WVDEP prohibiting it from issuing permits for the construction of valley fills over both intermittent and perennial stream segments as part of mining operations. While Massey is not a party to this litigation, virtually all mining operations (including those of Massey) utilize valley fills to dispose of excess materials mined during coal production. On April 24, 2001, the Fourth Circuit Court of Appeals overruled the district court, finding that the 11th Amendment to the U.S. Constitution barred the suit against DEP in Federal Court. On July 13, 2001, the Fourth Circuit Court of Appeals denied the plaintiffs' petition for rehearing en banc. The plaintiffs may appeal the Fourth Circuit decision to the U.S. Supreme Court. c) On August 21, 2001, the Kentuckians for the Commonwealth, an environmental group, sued the U.S. Corps of Engineers (the "Corps") for issuing a Nationwide Permit (i.e., a general permit issued for a class of activities that does not require a permit applicant to undergo individual review) to Martin County Coal allowing construction of valley fills in waters of the United States. The lawsuit, filed in the United States District Court for the Southern District of West Virginia, alleges that the Corps lacks the authority under the Clean Water Act to issue permits for valley fills in waters of the United States. Alternatively, the plaintiffs argue that fills cannot be approved: (i) pursuant to a Nationwide Permit rather than an individual permit; (ii) without an environmental impact statement; (iii) without analyzing measures for avoiding and minimizing impacts on streams; and (iv) without waiting for the U.S. Environmental Protection Agency to complete proceedings under the Clean Water Act to veto Martin County Coal's permit. Prior to the lawsuit being filed, Martin County Coal sold the property subject to the permit to an unrelated company and the Corps is in the process of transferring the permit to that company. While neither Martin County Coal nor Massey are a party to this litigation, virtually all mining operations (including those of Massey) utilize valley fills to dispose of excess materials mined during coal production. d) On August 31, 2001, the United States District Court for the Southern District of West Virginia issued a ruling on a suit by the West Virginia Highlands Conservancy, an environmental group, against the federal Office of Surface Mining ("OSM"). The court ruled that OSM has failed to require the WVDEP to insure that adequate reclamation bonds exist to ensure the reclamation of mining operations in the event of bond forfeitures. However, prior to the court's ruling, OSM initiated proceedings that could lead to it taking over the West Virginia bonding program by setting deadlines for WVDEP to increase the amount paid toward reclamation bonds. Consequently, the court did not order immediate takeover by OSM of the West Virginia bonding program; rather, it ruled that the court intends to enforce OSM's established deadlines against WVDEP. e) On July 17, 2001, the Board of Directors established the Public and Environmental Policy Committee and appointed James H. Harless, James L. Gardner and E. Gordon Gee, as members. Mr. Harless will also serve as chairman of the committee. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit No. Description ----------- ----------- 10 Amendment to Massey Energy Company 1982 Shadow Stock Plan dated July 17, 2001 (b) Reports on Form 8-K. None 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MASSEY ENERGY COMPANY ----------------------------------- (Registrant) Date: September 14, 2001 /s/ J. M. Jarosinski ----------------------------------- J. M. Jarosinski, Vice President - Finance and Chief Financial Officer /s/ E. B. Tolbert ----------------------------------- E. B. Tolbert, Controller EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10 Amendment to Massey Energy Company 1982 Shadow Stock Plan dated July 17, 2001 15 EX-10 3 dex10.txt EXHIBIT 10 Exhibit 10 - ---------- First Amendment to the Massey Energy Company 1982 Shadow Stock Plan ---------------------- Effective July 17, 2001, the Massey Energy Company 1982 Shadow Stock Plan, As Amended and Restated Effective November 30, 2000, is amended to revise Section 5.01 to add the phrase "Effective for grants made through July 16, 2001," to the beginning of the first sentence and to add the following sentence to the end thereof: Effective for grants made on and after July 17, 2001, subject to adjustment pursuant to the provisions of Section 5.2 hereof, the number of unexercised Units granted pursuant to Section 6.1(b) hereunder shall not exceed 1,050,000. I, Madeleine M. Curle, the duly-elected and qualified Vice-President -Human Resources of A. T. Massey Coal Company, Inc. hereby certify that the First Amendment to the Massey Energy Company 1982 Shadow Stock Plan set forth above was adopted by the Board of Directors of Massey Energy Company at its meeting of July 17, 2001, which action remains in full force as of this date. /s/ Madeleine M. Curle ----------------------- Madeleine M. Curle Date: August 31, 2001 -----END PRIVACY-ENHANCED MESSAGE-----