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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of the registrant's voting stock held by
non-affiliates was $698,064,369.80 on February 28, 2003 based upon the volume
weighted average sales price of the registrant's Common Stock.
Common Stock, $0.625 par value, outstanding as of February 28, 2003 -
75,322,095 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the
registrant's definitive proxy statement for the 2003 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 December 31, 2002.
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From time to time, Massey Energy Company (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) 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."
Massey makes available free of charge on or through its Internet website,
www.masseyenergyco.com, its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as
reasonably practicable after it is electronically filed with, or furnished to,
the Securities and Exchange Commission. You may also request copies of our
filings, at no cost, by telephone at (866) 814-6512 or by mail at: Massey Energy
Company, 4 North 4th Street, Richmond, Virginia 23219, attention: Investor
Relations.
Part I
Item 1. Business
Massey produces, processes and sells bituminous, low sulfur coal of steam
and metallurgical grades through its nineteen processing and shipping centers,
called "resource groups," many of which receive coal from multiple coal mines.
Massey currently operates 29 underground mines (four of which employ both room
and pillar and longwall mining) and 14 surface mines (with seven highwall miners
in operation) in West Virginia, Kentucky and Virginia. The number of mines that
Massey's operates may vary from time to time depending on a number of factors,
including the existing demand for and price of coal and exhaustion of
economically recoverable reserves. Massey's 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. In the
Energy Ventures Analysis ranking of coal companies by 2002 revenue, Massey is
the fourth largest coal company in the United States, and the largest in the
Central Appalachian region.
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
Corporation in 1981. A. T. Massey was wholly owned by Fluor Corporation from
1987 until November 30, 2000, when 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.
The Company changed to a calendar-year basis of reporting financial
results effective January 1, 2002. For comparative purposes, the reported
audited consolidated results of operations and cash flows for 2001 and 2000
annual periods are for the twelve months ended October 31. As a requirement of
the change in fiscal year, the Company is reporting consolidated results of
operations and cash flows for a special transition period for the two months
ended December 31, 2001 (audited) compared with the two-months ended December
31, 2000 (unaudited). The comparative audited consolidated balance sheets are as
of December 31, 2002 and October 31, 2001.
2
Industry Overview
A major contributor to the world energy supply, coal represents
approximately 23% of the world's primary energy consumption according to the
World Coal Institute. The primary use for coal is to fuel electric power
generation. In calendar year 2002, it is estimated that coal generated 51% of
the electricity produced in the United States according to the Energy
Information Administration, a statistical agency of the U. S. Department of
Energy.
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 70% of the nation's fossil fuel reserves according to Energy
Ventures Analysis. Total coal reserves are estimated by comparing the total
probable heat value (British thermal units ("Btus") per pound) of the
demonstrated coal reserve tonnage reported by the Department of Energy to the
heat value of other fossil fuel energy resources reported by the Department of
Energy.
U.S. coal production has more than doubled during the last 30 years. In
2002, 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 (38%), Central Appalachia (23%), Midwest (14%), Northern
Appalachia (12%), West (other than the Powder River Basin) (12%) and other (1%).
All of the Company's coal production comes from the Central Appalachian region.
Approximately 66% of U.S. coal is produced by surface mining methods. The
remaining 34% is produced by underground mining methods that include room and
pillar mining and longwall mining (more fully described in "Mining Methods,"
below).
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 2002 U.S. coal demand, as estimated by Resource Data
International, Inc. ("RDI"), is as follows:
End Use Tons (millions) % of Total
------- --------------- ----------
Electricity generation 982 86%
Industrial users 66 6%
Exports 64 6%
Steel making 27 2%
Residential & commercial 5 --%
--------------- ----------
Total 1,144 100%
=============== ==========
Coal has long been favored as an electricity generating fuel by regulated
utilities because of its basic economic advantage. The largest cost component in
electricity generation is fuel. This fuel cost is typically lower for coal than
competing fuels such as oil and natural gas on a Btu-comparable basis. RDI
estimated the average total production costs of electricity, using coal and
competing generation alternatives in 2002 as follows:
Electricity Generation Type Cost per million Kilowatt Hours
- --------------------------- -------------------------------
Oil $ 4.854
Natural Gas $ 4.422
Coal $ 1.819
Nuclear $ 1.785
Other (solar, wind, etc.) $ 0.979
Hydroelectric $ 0.527
According to RDI, 15 of the 25 lowest operating cost power plants in the
United States during 2001 were fueled by coal. Coal used as fuel to generate
electricity is commonly referred to as "steam coal."
3
There are factors other than fuel cost that influence each utility's choice
of electricity generation mode, including facility construction cost, access to
fuel transportation infrastructure, environmental restrictions, and other
factors. The breakdown of U.S. electricity generation by fuel source in 2002, as
estimated by the Energy Information Administration, is as follows:
Electricity Generation Source % of Total Electricity Generation
- ----------------------------- ---------------------------------
Coal 51%
Nuclear 21%
Natural Gas 17%
Hydro 6%
Oil 3%
Other 2%
----------
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 fifth among worldwide exporters of coal. Australia
is the largest exporter, with other major exporters including South Africa,
Indonesia, Canada, China, Russia 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
electricity 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 other chemical
attributes. Metallurgical coal is also high in heat content (as measured in
Btus), and therefore is desirable to utilities as fuel for electricity
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 88% of domestic metallurgical coal and 96% of U.S.
exported metallurgical coal during 2002.
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 2002.
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 or has any
investment in the World Coal Institute, the Energy Information Administration,
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 mining
machines cut three to nine 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 40 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
4
is 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, cutting a slice 3.5 feet deep.
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.
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 and making other improvements that have local
community benefit.
Highwall mining is used in connection with surface mining. A highwall
mining system consists of a remotely controlled continuous mining machine, 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 mining machines in the room and pillar method of
underground mining represented approximately 39% of Massey's 2002 coal
production.
Production from underground longwall mining operations constituted about
16% of Massey's 2002 production. Massey now operates four longwall units.
Surface mining represented approximately 35% of Massey's 2002 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 10% of
Massey's 2002 coal production.
Mining Operations
Massey currently has nineteen distinct resource groups or mining complexes,
including fourteen in West Virginia, four in Kentucky and one in Virginia. These
complexes 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
91% of 2002 coal shipments.
5
The following table provides key operational information on all Massey
mining complexes (Resource Groups) that were active in 2002.
Massey Resource Groups
Year Established
Resource Group Name Location 2002 Production(1) 2002 Shipments or Acquired
(000's of Tons) (000's of Tons)
- ------------------- -------- ------------------ -------------- ----------------
West Virginia Resource
Groups
Black Castle Boone County, WV 2,972 643 1987
Delbarton Mingo County, WV 2,807 2,595 1999
Eagle Energy Boone County, WV - 192 1996
Elk Run Boone County, WV 2,147 4,118 1978
Green Valley Nicholas County, WV 829 803 1996
Independence Boone County, WV 3,728 3,082 1994
Logan County Logan County, WV 3,572 3,353 1998
Marfork Raleigh County, WV 2,792 5,428 1993
Nicholas Energy Nicholas County, WV 4,627 4,310 1997
Omar Boone County, WV - 1,020 1954
Performance Raleigh County, WV 3,355 1,188 1994
Progress Boone County, WV 4,330 2,464 1998
Rawl Mingo County, WV 1,988 1,511 1974
Stirrat Logan County, WV - 342 1993
Kentucky Resource Groups
Long Fork Pike County, KY - 1,342 1991
Martin County Martin County, KY 3,025 2,755 1969
New Ridge Pike County, KY - 1,288 1992
Sidney Pike County, KY 7,269 4,982 1984
Virginia Resource Group
Knox Creek Tazewell County, VA 492 509 1997
Other/Unassigned N/A N/A 196 N/A
------------ -------------
TOTAL 43,933 42,121
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(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.
The following descriptions of the Company's resource groups are current as of
February 28, 2003.
West Virginia Resource Groups
Black Castle. The Black Castle mining complex includes a large surface
mine, a highwall miner and an underground belt conveyor system that transports
direct-ship coal (i.e., coal that is shipped without processing) to the Omar
resource group for loading. The remaining surface mined coal and the highwall
miner production is trucked to the Independence preparation plant for cleaning
and loading. In years previous to 2002, production from Black Castle was shown
in the Elk Run resource group production.
Delbarton. The Delbarton complex includes an underground room and pillar
mine and a preparation plant. This mine was idled in February 2002 due to weak
demand for steam coal but was re-activated in January 2003. Production from this
mine is transported to the adjacent Delbarton preparation plant via overland
conveyor. The Delbarton preparation plant also processes coal from two surface
mines of the Logan County resource group. The Delbarton preparation plant can
process 600 tons per hour. The clean coal product is shipped to customers via
the Norfolk Southern railway in unit trains of up to 110 railcars.
During the third quarter of 2002, the Company decided that a section of the
idled mine at Delbarton that crossed under a creek would not be utilized in
future mining plans. Unamortized development costs related to this section of
the mine of approximately $9.2 million were written off in the third quarter.
For further discussion, please see Note 2 to the Consolidated Financial
Statements, "Impairment of Long-Lived Assets."
Eagle Energy. The Eagle Energy complex is currently inactive but has
historically processed coal production from the adjacent underground longwall
mine. The economically accessible reserves in this mine were depleted in January
2000 and the operation was idled. The Eagle Energy preparation plant has a rated
feed capacity of 750 tons per hour. Customers are served via CSX railway in unit
trains of up to 90 railcars. Plans are under review to re-activate this complex
using production from new mines in Massey controlled properties adjacent to the
preparation plant.
6
Elk Run. Elk Run produces coal from three underground room and pillar
mines, which deliver coal to its preparation plant by belt and truck. The
surface mine that was previously a part of the Elk Run resource group is now
part of the Black Castle resource group. Additionally, Elk Run processes coal
for shipment that is produced by surface mines of the Progress resource group.
Coal from these mines is transported via underground conveyor system. The Elk
Run preparation plant has a processing capacity of 2200 tons per hour. Elk Run
also operates a 200 ton per hour stoker facility which produces screened, small
dimension coal for certain of Massey's industrial customers. Customer shipments
are loaded on the CSX rail system in unit trains of up to 150 railcars.
Green Valley. The Green Valley complex includes two underground room and
pillar mines and a preparation plant. The Green Valley preparation plant
receives coal from the two mines via truck and 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 includes the Justice longwall mine,
three room and pillar mines and a preparation plant. Production from two of the
deep mines is transported via underground conveyor system directly to the
Independence preparation plant. Additionally, Independence processes coal for
shipment that is produced from the Black Castle resource group and the Progress
resource group. Both the Black Castle surface mine and highwall miner, and the
West Cazy surface mine and highwall miner of the Progress resource group
transport coal requiring processing to the Independence preparation plant via
truck. Two of the underground room and pillar mining operations of Independence
ship coal via belt conveyor to the preparation plant of the Performance resource
group for processing. The Independence plant has a processing capacity of 2200
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 includes five surface mines, three
highwall miners, one underground room and pillar mine and the Aracoma longwall
mine, plus the Bandmill preparation plant and the Feats loadout. The surface
mines and highwall miners deliver coal to the Bandmill plant via truck, while
both underground mines belt coal directly to this plant. Two surface mines also
deliver direct-ship coal to the Feats loadout by truck. A portion of the coal
from two of the surface mines, North Surface and South, and the highwall miners
is also delivered to the Delbarton preparation plant by truck. Another surface
mine, Sheep Fork, transports its coal by truck to the Rawl plant for processing
and shipment. The Bandmill preparation plant 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 includes four underground room and pillar
mines and a preparation plant. The largest production source for the Marfork
complex is the Upper Big Branch longwall mine of the Performance resource group.
Approximately half of the Marfork production is belted directly to the
preparation plant via conveyor while the remainder is trucked on private
haulroads. The Marfork preparation plant has a capacity of 2400 tons per hour.
Customers are served via the CSX rail system with unit trains of up to 150
railcars.
Nicholas Energy. The Nicholas Energy complex includes a large surface mine,
a highwall miner, an underground room and pillar mine and a preparation plant.
Coal from the underground mine, the highwall miner, and the portion of surface
mined coal requiring processing is transported to the preparation plant via
overland conveyor system. The plant has a processing capacity of 1200 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 crushes and loads direct-ship coal at its
preparation plant from the adjacent surface mining operation of the Black Castle
resource group. Production is transported via underground conveyor system to the
Omar direct-ship facility. The direct-ship facility can crush 800 tons per hour.
The Omar preparation plant, which can process 800 tons per hour, is currently
inactive. Omar serves CSX rail system customers with unit train shipments of up
to 110 railcars.
Performance. The Performance mining complex includes the Upper Big Branch
longwall mine and the Goals preparation plant. Most of the production from Upper
Big Branch is shipped via overland conveyor to the preparation plant at the
Marfork resource group. The balance of the production from this mine is shipped
via truck to the Goals preparation plant. This plant also processes the
production, received by belt conveyor, of two adjacent underground mines of the
Independence resource group. The Goals preparation plant can process 800 tons
per hour. The rail loading facility serves CSX railway customers with unit
trains of up to 90 railcars.
Progress. The Progress mining complex includes four surface mines,
including the Upper Big Branch and Twilight MTR surface mines, a highwall miner
and a direct-ship railroad load out. All production from the highwall miner and
two of the surface mines is processed through a coal handling system and
transported via underground conveyor to the Elk Run resource group for
processing and rail shipment. Another surface mine trucks direct-ship coal to
the rail loadout, located on the CSX railroad and trucks the coal requiring
processing to the Independence resource group.
Rawl. The Rawl complex includes two active underground room and pillar
mines, one surface mine and the Sprouse Creek processing plant. The mines
transport coal to the Sprouse Creek plant via truck. In addition, a contract
mine and two purchased-coal sources ship coal to the Sprouse Creek plant via
truck. The Sprouse Creek plant has a throughput capacity of 1450 tons per hour.
Customers are served via the Norfolk Southern railway with unit trains of up to
150 railcars.
7
Stirrat. The Stirrat underground room and pillar mine and preparation plant
were idled in January 2003. When in production, all coal from the underground
mine is transported via belt line to the 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.
The Company decided to permanently abandon a previously idled mine at the
Stirrat resource group during the third quarter of 2002. Unamortized development
costs of approximately $2.3 million were written off in the third quarter as a
result of the mine closure. For further discussion, please see Note 2 to the
Consolidated Financial Statements, "Impairment of Long-Lived Assets."
Kentucky Resource Groups
Long Fork. The Long Fork preparation plant processes coal produced by the
adjacent Solid Energy underground room and pillar mine and Rockhouse longwall
mine of the Sidney resource group. All production is transported via 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. Martin County includes one underground mine, a surface mine,
a highwall miner and a preparation plant. The direct-ship portion of the
production from the surface mine and highwall miner is shipped to river docks
via truck. The balance of the coal is transported by conveyor belt to the
preparation plant for processing. Martin County's preparation plant has a
throughput capacity of 1500 tons per hour. All coal from the preparation plant
is shipped via the Norfolk Southern railway in unit trains of up to 125
railcars.
New Ridge. The New Ridge complex loads clean coal that is transported via
truck from the Big Creek preparation plant of Massey's Sidney resource group.
The New Ridge preparation plant, idled in April, 2002, 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 five underground room and pillar mines,
the Rockhouse longwall mine, a surface mine, a highwall miner, the Big Creek
preparation plant and the Sandlick direct-ship loadout facility. Two of the
underground mines transport coal via underground conveyor to the 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
preparation plant. A portion of the coal from the plant and the direct-ship coal
from the surface mine is trucked to the Sandlick loadout and to the New Ridge
resource group for loading into railroad cars. The Big Creek preparation plant
has a throughput capacity of 1500 tons per hour. The rail loading facility at
the preparation plant and the direct-ship facility both serve customers on the
Norfolk Southern rail system with unit trains of up to 140 railcars.
During the third quarter of 2002, Sidney closed a mine and decided to
forego mining the final section of reserves. Unamortized development costs of
approximately $1.7 million were written off as a result of the mine closure. For
further discussion, please see Note 2 to the Consolidated Financial Statements,
"Impairment of Long-Lived Assets."
Virginia Resource Group
Knox Creek. Knox Creek includes the Tiller No. 1 underground room and
pillar mine and a preparation plant. Production from the mine is belted directly
to the preparation plant. The plant has a feed capacity of 650 tons per hour.
The preparation plant serves customers on the Norfolk Southern rail system with
unit trains of up to 100 railcars.
The following chart lists the active mines, by type, at the Company's
resource groups.
Underground
Resource Group Surface Mine Mine Total
-------------- ------------ ----------- -----
Black Castle 1 (1HW) 0 1
Delbarton 0 1 1
Elk Run 0 4 4
Green Valley 0 2 2
Independence 0 4 (1 LW) 4
Logan County 5 (3 HW) 2 (1 LW) 7
Marfork 0 4 4
Nicholas Energy 1 (1 HW) 1 2
Performance 0 1 (1 LW) 1
Progress 4 (1 HW) 0 4
Rawl 1 2 3
Martin County 1 (1 HW) 1 2
Sidney 1 6 (1 LW) 7
Knox Creek 0 1 1
------------ ----------- -----
Total 14 29 43
LW - longwall mine
HW - highwall miners operated in conjunction with surface mines
8
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: Marfork Coal Company, Inc., a subsidiary of the
Company, manages the Appalachian Synfuel facility under an operating agreement.
Marfork receives fees for the operation of the facility. The Appalachian Synfuel
facility processes coal fines (waste coal or crushed coal comprised of
particles, the majority of which, by size, are no larger than 3/8 inch) into a
pelletized coal product. See Note 5 to the Consolidated Financial Statements for
further information regarding Appalachian Synfuel, LLC.
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 own and
operate coal unloading, storage and conveying facilities at Eastman Chemical
Company's facility in Kingsport, Tennessee (the "Eastman CHS"). The Eastman CHS
was constructed by Massey subsidiaries and went into service in September 2002.
The Eastman CHS operating agreement extends through 2017 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.
Other: Massey also engages in the sale of certain non-strategic assets such
as timber, oil and gas 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 and
administrative personnel.
During the year ended December 31, 2002, Massey sold 42.1 million tons of
produced coal for total produced coal revenue of $1.3 billion. The breakdown of
produced tons sold by market served was 65% utility, 26% metallurgical and 9%
industrial. Sales were concluded with over 125 customers. Export shipments
(including Canada) represented approximately 14% of 2002 tonnage sold. Massey's
2002 export shipments serviced customers in 7 countries across North America,
South America and Europe. 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 derives less than 1% of its total revenue through the Eastman
CHS, which became operational in September 2002. The Company receives
coal handling, facility maintenance and facility lease fees at the
Eastman CHS.
o At three steel companies and numerous industrial plants, Massey
subsidiaries coordinate shipment of coal to the customers' stockpiles,
maintain ownership of the coal inventory on site and sell tonnage to
the customers as it is consumed, the point at which title to the coal
is transferred to the purchasers.
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 2002 shipments of 42.1 million tons were loaded from 19 mining
complexes. Rail shipments constituted 91% of total shipments, with 33% loaded on
Norfolk Southern trains and 58% loaded on CSX trains. The 9% balance was shipped
from Massey mining complexes via truck.
9
Approximately 14% 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 8% of its
production to Great Lakes Ports for transport beyond to various U.S. and
Canadian customers.
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, affiliates of DTE Energy Corporation, accounted for
12% of Massey's total fiscal year 2002 produced coal revenue. In addition, sales
to Duke Energy Corporation and its affiliate, Duke Energy Merchants, a Massey
customer for over thirty years with agreements in place to supply coal through
June 2003, accounted for 11% of Massey's total fiscal year 2002 produced coal
revenue.
Massey has contracts to supply coal to energy trading and brokering
companies under which those companies sell such coal to the ultimate users.
During 2002, the creditworthiness of the energy trading and brokering companies
with which we do business declined, increasing the risk that we may not be able
to collect payment for all coal sold and delivered to or on behalf of these
energy trading and brokering companies. To mitigate credit-related risks in all
customer classifications, Massey maintains a credit policy, which requires
scheduled reviews of customer creditworthiness and continuous monitoring of
customer news events which might have an impact on their financial condition.
Negative credit performance or events may trigger the application of tighter
terms of sale, requirements for collateral or, ultimately, a suspension of
credit privileges.
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. In recent
years, American steel producers 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. The United States government determined that
some steel producers in some foreign countries were selling steel products in
the United States at below cost and has imposed certain tariffs on products from
various foreign countries. The imposition of the tariffs has led to a moderate
increase in the price of some steel products in the United States. However,
several large American producers filed for bankruptcy protection both before and
after the tariffs were imposed, including two substantial customers of Massey:
Wheeling-Pittsburgh Steel Corporation, which filed for bankruptcy protection in
late 2000, accounted for approximately 3% of the Company's produced coal revenue
in 2002, and Bethlehem Steel Corporation, which filed for bankruptcy protection
in mid-2001, accounted for approximately 2% of the Company's produced coal
revenue in 2002. 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 2% of the Company's produced coal revenue
for 2002. We continue to sell to these financially stressed customers on very
restrictive terms. 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. For
the year ended December 31, 2002, approximately 94% of our coal sales volume was
pursuant to long-term contracts. The Company believes that in 2003, the
percentage of sales pursuant to long-term arrangements will be comparable with
the percentage of sales for 2002. Please see Item 7A., Quantitative and
Qualitative Discussions, about Market Risk for further discussion on managing
Massey's commodity price risk through the use of long-term coal supply
agreements.
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.
For 2003, we expect to produce 40 to 45 million tons of coal. In addition,
the Company purchases coal from third-party coal producers from time to time to
supplement production and resells this coal to its customers. As of December 31,
2002, the Company had commitments to purchase 2.0 million tons during 2003 and
0.7 million tons in 2004 and 2005. The following table sets forth, as of
February 28, 2003, the total tons of coal the Company is committed to deliver at
prices that are determined under existing contracts during calendar years 2003
through 2007.
10
Tons of Coal to be Delivered
(in millions of tons)
--------------------------------------------------------
2003 2004 2005 2006 2007
---- ---- ---- ---- ----
Volume under existing contracts.......... 38.0 16.3 11.5 5.9 4.4
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 and cost 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
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, it is the Company's goal to
reduce 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 December 31, 2002, Massey had 4,552 employees, including 171
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 Resource
Conservation and Recovery Act ("RCRA") or the Comprehensive Environmental
11
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 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."
SMCRA. The Surface Mining Control and Reclamation Act ("SMCRA"), 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. SMCRA 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.
On March 29, 2002, the U.S. District Court for the District of Columbia
issued a ruling that could restrict underground mining activities conducted in
the vicinity of public roads, within a variety of federally protected lands,
within national forests and within certain proximity to occupied dwellings. The
lawsuit, Citizens Coal Council v. Norton, was filed in February 2000 to
challenge regulations issued by the Department of Interior providing, among
other things, that subsidence and underground activities that may lead to
subsidence are not surface mining activities within the meaning of SMCRA. SMCRA
generally contains restrictions and certain prohibitions on the locations where
surface mining activities can be conducted. The District Court entered summary
judgment upon the plaintiff's claims that the Secretary of the Interior's
determination violated SMCRA. By order dated April 9, 2002, the court remanded
the regulations to the Secretary of the Interior for reconsideration. The
significance of this decision for the coal mining industry remains unclear
because this ruling is subject to appellate review. The Department of Interior
and the National Mining Association, a trade group that intervened in this
action, sought a stay of the order pending appeal to the U.S. Court of Appeals
for the District of Columbia Circuit and the stay was granted. If the District
Court's decision is not overturned, or if some legislative solution is not
enacted, this ruling could have a material adverse effect on all coal mine
operations that utilize underground mining techniques, including those of the
Company. While it still may be possible to obtain permits for underground mining
operations in these areas, the time and expense of that permitting process are
likely to increase significantly.
Black Lung. 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.
Clean Water Act. Section 301 of the Clean Water Act prohibits the discharge
of a pollutant from a point source into navigable waters except in accordance
with a permit issued under either Section 402 or Section 404 of the Clean Water
Act. Navigable waters are broadly defined to include streams, even those that
are not navigable in fact, and may include wetlands. All mining operations in
Appalachia generate excess material, which must be placed in fills in adjacent
valleys and hollows. Likewise, coal refuse disposal areas and coal processing
slurry impoundments are located in valleys and hollows. Almost all of these
areas contain intermittent or perennial streams, which are considered navigable
waters. An operator must secure a Clean Water Act permit before filling such
streams. For approximately the past twenty-five years, operators have secured
Section 404 fill permits to authorize the filling of navigable waters with
material from various forms of coal mining. Operators have also obtained permits
under Section 404 for the construction of slurry impoundments although the use
of these impoundments, including discharges from them, requires permits under
Section 402. Section 402 discharge permits are generally not suitable for
authorizing the construction of fills in navigable waters.
On May 8, 2002, the United States District Court for the Southern District
of West Virginia issued an order in Kentuckians for the Commonwealth v.
Rivenburgh enjoining the Huntington, West Virginia office of the U.S. Army Corps
of Engineers from issuing permits under Section 404 of the Clean Water Act for
the construction of valley fills for the disposal of overburden from mountaintop
mining operations solely for the purpose of waste disposal. The court held that
the filling of these waters solely for waste disposal is a violation of the
Clean Water Act. The court's injunction also prohibits the issuance of permits
authorizing fill activities associated with types of mining activities other
than mountaintop mining where the primary purpose or use of those fill
activities is the disposal of waste. Such activities might include those
associated with slurry impoundments and coal refuse disposal areas.
12
On January 29, 2003, the Fourth Circuit Federal Court of Appeals reversed
the district court's decision and lifted the injunction. The time for filing a
possible appeal has not yet expired. If the decision of the Court of Appeals
were reversed and the injunction reinstated, the effect would be to make
mountaintop mining uneconomical in those areas subject to the injunction and
call into question the ability of the Company to obtain permits with respect to
other mining activities that use valley fills.
In January 2002, a number of environmental groups and individuals filed
suit in the U.S. District Court for the Southern District of West Virginia to
challenge the U.S. Environmental Protection Agency's ("EPA's") approval of West
Virginia's antidegradation implementation policy. Under the federal Clean Water
Act, state regulatory authorities must conduct an antidegradation review before
approving permits for the discharge of pollutants to waters that have been
designated as high quality by the state. Antidegradation review involves public
and intergovernmental scrutiny of permits and requires permittees to demonstrate
that the proposed activities are justified in order to accommodate significant
economic or social development in the area where the waters are located. The
plaintiffs in this lawsuit, Ohio Valley Environmental Coalition v. Whitman,
challenge provisions in West Virginia's antidegradation implementation policy
that exempt current holders of National Pollutant Discharge Elimination System
(NPDES) permits and Section 404 permits, among other parties, from the
antidegradation-review process. The Company is exempt from antidegradation
review under these provisions. Revoking this exemption and subjecting the
Company to the antidegradation review process could delay the issuance or
reissuance of Clean Water Act permits to the Company or cause these permits to
be denied. If the plaintiffs are successful and if the Company discharges into
waters that have been designated as high-quality by the state, the costs, time
and difficulty associated with obtaining and complying with Clean Water Act
permits for surface mining could increase.
Clean Air Act. 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. Owners of coal-fired power plants and
industrial boilers have been required to expend considerable resources in an
effort to comply with these ambient air standards. Significant additional
emissions control expenditures will be needed in order to meet the current
national ambient air standard for ozone. In particular, coal-fired power plants
will be affected by state regulations designed to achieve attainment of the
ambient air quality standard for ozone. Ozone is produced by the combination of
two precursor pollutants: volatile organic compounds and nitrogen oxides.
Nitrogen oxides are a by-product of coal combustion. Accordingly, emissions
control requirements for new and expanded coal-fired power plants and industrial
boilers will continue to become more demanding in the years ahead. 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 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. 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. On remand, the Court of Appeals for the D.C. Circuit affirmed the EPA's
adoption of these more stringent ambient air quality standards. As a result of
the finalization of these standards, states that are not in attainment for these
standards will have to revise their State Implementation Plans to include
provisions for the control of ozone precursors and/or particulate matter.
Revised State Implementation Plans could require electric power generators to
further reduce nitrogen oxide and particulate matter emissions. The potential
need to achieve such emissions reductions could result in reduced coal
consumption by electric power generators. Thus, future regulations regarding
ozone, particulate matter and other pollutants could restrict the market for
coal and the development of new mines by the Company. This in turn may result in
decreased production by the Company and a corresponding decrease in the
Company's revenue. Although the future scope of these ozone and particulate
matter regulations cannot be predicted, future regulations regarding these and
other ambient air standards could restrict the market for coal and the
development of new mines.
Furthermore, in October 1998, the EPA finalized a rule that will require 19
states in the Eastern United States that have ambient air quality problems to
make substantial reductions in nitrogen oxide emissions by the year 2004. The
final rule was largely upheld by the United States Court of Appeals for the
District of Columbia Circuit. To achieve reductions in nitrogen oxide emissions
by 2004, many power plants would be required to install additional control
measures such as capital-intensive selective catalytic reduction (SCR) devices.
The installation of these measures would make it more costly to operate
coal-fired power plants and, depending on the requirements of individual state
implementation plans, could make coal a less attractive fuel. In addition,
reductions in nitrogen oxide emissions can be achieved at a low capital cost
through a combination of low nitrogen oxide burners and coal produced in western
U.S. coal mines. As a result, changes in current emissions standards could also
impact the economic incentives for eastern U.S. coal-fired power plants to
consider using more coal produced in western U.S. coal mines.
Along with these regulations addressing ambient air quality, the EPA has
initiated a regional haze program designed to protect and to improve visibility
at and around National Parks, National Wilderness Areas and International Parks.
This program restricts the construction of new coal-fired power plants whose
operation may impair visibility at and around federally protected areas.
Moreover, this program may require certain existing coal-fired power plants to
install additional control measures designed to limit haze-causing emissions,
such as sulfur dioxide, nitrogen oxides and particulate matter. EPA's final rule
concerning best available retrofit technology (BART) is currently on remand to
the Agency from the United States Court of Appeals for the District of Columbia
Circuit. By imposing limitations upon the placement and construction of new
coal-fired power plants, the EPA's regional haze program could affect the future
market for coal.
13
Additionally, the U.S. Department of Justice, on behalf of the EPA, has
filed lawsuits against several investor-owned electric utilities and brought an
administrative action against one government-owned electric utility for alleged
violations of the Clean Air Act. The EPA claims that these utilities have failed
to obtain permits required under the Clean Air Act for alleged major
modifications to their power plants. The Company supplies coal to some of the
currently affected utilities, and it is possible that other of the Company's
customers will be sued. These lawsuits could require the utilities to pay
penalties and install pollution control equipment or undertake other emission
reduction measures, which could adversely impact their demand for coal.
Other Clean Air Act programs are also applicable to power plants that use
the Company's coal. For example, the acid rain control provisions of Title IV of
the Clean Air Act require a reduction of sulfur dioxide emissions from power
plants. Because sulfur is a natural component of coal, required sulfur dioxide
reductions can affect coal mining operations. Title IV imposes a two-phase
approach to the implementation of required sulfur dioxide emissions reductions.
Phase I, which became effective in 1995, regulated the sulfur dioxide emissions
levels from 261 generating units at 110 power plants and targeted the highest
sulfur dioxide emitters. Phase II, implemented January 1, 2000, made the
regulations more stringent and extended them to additional power plants,
including all power plants of greater than 25 megawatt capacity. Affected
electric utilities can comply with these requirements by:
o burning lower sulfur coal, either exclusively or mixed with higher
sulfur coal;
o installing pollution control devices such as scrubbers, which reduce
the emissions from high sulfur coal;
o reducing electricity generating levels; or
o purchasing or trading emission credits.
Specific emissions sources receive these credits that electric utilities
and industrial concerns can trade or sell to allow other units to emit higher
levels of sulfur dioxide. Each credit allows its holder to emit one ton of
sulfur dioxide.
In addition to emissions control requirements designed to control acid rain
and to attain the national ambient air quality standards, the Clean Air Act also
imposes standards on sources of hazardous air pollutants. Although these
standards have not yet been extended to coal mining operations, the EPA recently
announced that it will regulate hazardous air pollutants from coal-fired power
plants. Under the Clean Air Act, coal-fired power plants will be required to
control hazardous air pollution emissions by no later than 2009. These controls
are likely to require significant new improvements in controls by power plant
owners. The most prominently targeted pollutant is mercury, although other
by-products of coal combustion may be covered by future hazardous air pollutant
standards for coal combustion sources. However, the introduction of mercury
emissions limits could place coal produced in western U.S. mines at a
competitive disadvantage to coal produced in eastern U.S. mines, as current
mercury-removal technology is more effective on eastern U.S. coal. EPA has
announced that it intends to issue a proposed rule concerning maximum achievable
control technology (MACT) for utilities by December 2003.
Other proposed initiatives may have an effect upon coal operations. Several
so-called multi-pollutant bills, which could regulate a variety of air
emissions, including carbon dioxide and mercury, have been proposed. One such
proposal is the Bush Administration's recently announced Clear Skies initiative.
As proposed, this initiative is designed to reduce emissions of sulfur dioxide,
nitrogen oxides and mercury from power plants. Senator James Jeffords has also
introduced a bill that would place tight caps on coal-fired emissions, including
mandatory limits on carbon dioxide emissions, and require shorter implementation
time frames. While the details of these proposed initiatives vary, there is
clearly a movement towards increased regulation of air emissions, including
carbon dioxide and mercury, which could cause power plants to shift away from
coal as a fuel source.
The Bush administration recently pledged $2 billion to the Clean Coal
Technology (CCT) Program. The CCT Program is a government and industry co-funded
effort to demonstrate a new generation of innovative coal-utilization processes
in a series of "showcase" facilities built across the country. These projects
are carried out in sufficiently large scale to prove commercial worthiness and
generate data for design, construction, operation, and technical/economic
evaluation of full -scale commercial applications. The goal of the CCT Program
is to furnish the U.S. energy marketplace with advanced, more efficient
coal-based technologies, technologies that are capable of mitigating some of the
economic and environmental impediments that inhibit the use of coal as an energy
source.
1992 Framework Convention on Global Climate Change. 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, which
specific emission targets vary from country to country, the United States would
be required to reduce emissions to 93% of 1990 levels over a five-year period
from 2008 through 2012. Although the United States has not ratified the emission
targets and no comprehensive regulations focusing on greenhouse gas emissions
are in place, these restrictions, whether through ratification of the emission
targets or other efforts to stabilize or reduce greenhouse gas emissions, could
adversely affect the price and demand for coal. In March 2001, President Bush
reiterated his opposition to the Kyoto Protocol and further stated that he did
not believe that the government should impose mandatory carbon dioxide emission
reductions on power plants. In February 2002, President Bush announced a new
approach to climate change, confirming the Administration's opposition to the
14
Kyoto Protocol and proposing voluntary actions to reduce the greenhouse gas
intensity of the United States. Greenhouse gas intensity measures the ratio of
greenhouse gas emissions, such as carbon dioxide, to economic output. The
President's climate change initiative calls for a reduction in greenhouse gas
intensity over the next 10 years which is approximately equivalent to the
reduction that has occurred over each of the past two decades.
Massey Operations - Permitting; Compliance. Massey's operations are
principally regulated under surface mining permits issued pursuant to the SMCRA
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 SMCRA, 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. See
Section 3, Legal Proceedings, for a discussion of orders issued to the Company's
subsidiaries to show cause why certain permits should not be revoked or
suspended for alleged violations of surface mining laws. 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. 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 2002, Massey spent approximately $6.9 million to comply with
environmental, health and safety laws and regulations, none of which
expenditures were capitalized. Massey anticipates making $13.1 million and $12.3
in such non-capital expenditures in 2003 and 2004, respectively. Of these
expenditures, $6.6 million, $11.6 million and $10.7 million for 2002, 2003 and
2004, 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 10 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
highwall mining are high-productivity, low-cost mining methods, Massey seeks to
increase production from its use of these methods to the extent permissible and
cost effective. The Company presently operates 29 active underground mines,
including four longwall mines, and 14 active surface mines.
15
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 December 31, 2002, less than 5% of Massey's total workforce was
represented by the United Mine Workers of America. Seven of Massey's coal
processing plants and one of its smaller surface mines have a workforce that is
represented by a union. In fiscal 2002, these seven processing plants handled
approximately 35% 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. Also, recently enacted legislation,
which raised coal truck weight limits in West Virginia, includes provisions
supporting enhanced enforcement. 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.
Recently, certain of Massey's subsidiaries, among others, have been named
as defendants in a lawsuit alleging that the defendants illegally transport coal
in overloaded trucks causing damage to state roads and interfering with the
plaintiffs' use and enjoyment of their properties and their right to use the
public roads, and seeking injunctive relief and damages. See Item 3, Legal
Proceedings for further discussion of this litigation.
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.
16
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 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 ("NMA") appealed this decision to the United States
Court of Appeals for the District of Columbia Circuit. By opinion dated June 14,
2002, the Court found that the Department of Labor exceeded its authority by
allowing judges to shift costs for expert witnesses from the claimant to the
employer, even if the claimant was unsuccessful. The Court further found that
certain provisions of the rule which applied to pending claims were
impermissibly retroactive. However, the Court denied NMA's appeal in all other
material respects. NMA did not seek review of this decision by the United States
Supreme Court.
The West Virginia legislature failed to pass a workers' compensation bill
that was sponsored by the employer community to address growing issues
surrounding the solvency of the state's workers' compensation program in the
legislative session that ended on March 8, 2003. Employer premiums are the
primary source of revenue to cover program costs. Therefore, both subscribing
employers to the state workers compensation fund as well as self-insured
employers who pay premiums to cover the cost of second injury claims could face
significant premium increases effective July 1, 2003 to help the state system
meet its workers' compensation program obligations unless reform legislation is
passed in a special session or unless new sources of revenue are identified. As
Massey's West Virginia operations are either subscribers to the state fund or
self-insured employers, the outcome of this issue may increase Massey's workers'
compensation costs in West Virginia.
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. See Item 1, Environmental, Safety
and Health Matters, for further discussion on the Clean Air Act. In order to
comply with limitations on emissions, Massey's customers may switch to other
fuels or coal from other regions.
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. See Item 1, Environmental, Safety and
Health Matters, for further discussion on the Kyoto Protocol. 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. See Item 1, Environmental, Safety and Health Matters, for further
discussion on the Clean Water Act. 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.
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.
17
Massey is subject to being adversely affected by the potential inability to
renew or obtain surety bonds
Federal and state laws require bonds to secure the Company's obligations to
reclaim lands used for mining, to pay federal and state workers' compensation,
and to satisfy other miscellaneous obligations. These bonds are typically
renewable annually. Surety bond issuers and holders may not continue to renew
the bonds or may demand additional collateral upon those renewals. The Company's
failure to maintain, or inability to acquire, surety bonds that are required by
state and federal law would have a material adverse effect on us. That failure
could result from a variety of factors including the following:
o Lack of availability, higher expense or unfavorable market terms of
new bonds;
o Restrictions on availability of collateral for current and future
third-party surety bond issuers under the terms of our senior notes or
revolving credit facilities; and
o The exercise by third-party surety bond issuers of their right to
refuse to renew the surety.
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.
Shortages of skilled labor in the Central Appalachian coal industry may pose
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.
Massey is subject to being adversely affected by a decline in the financial
condition and creditworthiness of the companies with which it does business
Massey has contracts to supply coal to energy trading and brokering
companies under which those companies sell such coal to the ultimate users.
Massey is subject to being adversely affected by any decline in the financial
condition and credit worthiness of these energy trading and brokering companies.
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. See the "Customers
and Coal Contracts" section of Item 1, Business, for further discussion.
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 December 31, 2002, it had total recoverable
reserves of approximately 2.2 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.
"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 0.7 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 (measured) 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.
18
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.
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 average royalties
for coal reserves from our producing properties (owned and leased) was
approximately 4.2% of produced coal revenue for the year ended December 31,
2002.
The following table provides proven and probable reserve data by "status"
(i.e., location, owned or leased, assigned or unassigned, etc.) as of December
31, 2002:
Recoverable reserves (in thousands of tons)(1)
---------------------------------------------------------------------------------------------
Location Total Proven Probable Assigned(2) Unassigned Owned Leased
- -------------------------------------------------------------------------- ------------------------------------------------------
Resource Groups:
West Virginia
- -------------
Delbarton Mingo County 310,332 139,036 171,297 155,343 154,989 10,394 299,938
Black Castle Boone County 53,214 37,817 15,397 35,899 17,315 - 53,214
Eagle Energy Boone County - - - - - - -
Elk Run Boone County 78,148 39,083 39,064 64,975 13,173 6,233 71,914
Green Valley Nicholas County 9,117 9,117 - 8,197 920 - 9,117
Independence Boone County 58,994 57,662 1,331 54,084 4,910 6,344 52,649
Logan County Logan County 89,457 89,457 - 45,871 43,586 - 89,457
Marfork Raleigh County 73,221 72,713 508 40,214 33,006 551 72,670
Nicholas Energy Nicholas County 108,107 98,197 9,910 66,116 41,991 67,487 40,620
Omar Boone County 35,946 16,400 19,546 - 35,946 2,229 33,717
Performance Raleigh County 38,192 38,192 - 37,446 746 38,192 -
Progress Boone County 92,748 83,862 8,885 92,748 - 30,914 61,834
Rawl Mingo County 113,460 82,742 30,718 64,994 48,466 1,420 112,040
Stirrat Logan County 5,482 3,595 1,886 422 5,060 - 5,482
Kentucky
- --------
Long Fork Pike County 5,616 3,273 2,343 610 5,006 - 5,616
Martin County Martin County 46,752 22,854 23,899 9,146 37,606 1,589 45,163
New Ridge Pike County - - - - - - -
Sidney Pike County 162,703 105,679 57,024 135,390 27,313 8,771 153,932
Virginia
- --------
Knox Creek Tazewell Co. 54,333 39,913 14,420 34,509 19,824 - 54,333
Other N/A 91,683 45,149 46,534 25,187 66,495 25,904 65,779
--------- ------- ------- ------- ------- ------- ---------
Subtotal 1,427,505 984,741 442,762 871,151 556,352 200,028 1,227,475
Land Management Companies:(3)
- -----------------------------
Boone Co., WV
Black King Raleigh, WV 60,764 60,764 395 60,368 23,037 37,727
Boone Co., WV
Boone East Kanawha, WV 212,483 173,639 38,845 89,682 122,802 93,755 118,728
Boone Co., WV
Boone West Logan Co., WV 258,397 100,924 157,473 10,595 247,802 67,128 191,269
Ceres Land Raleigh, WV 12,397 10,142 2,255 - 12,397 - 12,397
Lauren Land Mingo Co., WV 142,640 94,383 48,257 11,447 131,194 20,360 122,281
Logan Co., WV
New Market Wyoming, WV 60,202 23,708 36,494 - 60,202 6,030 54,172
Raleigh, WV
Raven Resources Boone Co., WV 31,890 21,893 9,997 - 31,890 - 31,890
------------------------------------------------------------------------------------------------
Subtotal 778,773 485,453 293,321 112,119 666,655 210,310 568,464
------------------------------------------------------------------------------------------------
Total 2,206,278 1,470,194 736,083 983,270 1,223,007 410,338 1,795,939
================================================================================================
19
Notes:
(1) Recoverable reserves represent the amount of proven and probable reserves
that can actually be recovered from the reserve base taking into account all
mining and preparation losses involved in producing a saleable product using
existing methods under current law. Reserve information reflects a moisture
factor of 6.5%. This moisture factor represents the average moisture present on
the Company's delivered coal.
(2) Assigned Reserves represent recoverable reserves that are dedicated to a
specific permitted mine. Otherwise, the reserves are considered Unassigned.
(3) Land management companies are Massey subsidiaries whose primary purposes are
to acquire and hold Massey's reserves.
The categorization of the "quality" (i.e., sulfur content, Btu, coal type,
etc.) of Massey's coal reserves is as follows:
Recoverable Reserves (in thousands of tons except Average Btu as received)(1)
Sulfur content
------------------------------------------
Recoverable Average BTU as
Reserves +1% -1% Compliance(2) received Coal Type(3)
------------------------------------------------------------------------------------ ---------------------------------------
Resource Groups:
West Virginia
-------------
Delbarton 310,332 119,784 190,549 138,830 13,476 Low Sulfur Utility
Low Sulfur Industrial
Black Castle 53,214 8,454 44,760 37,819 12,552 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Eagle Energy - - - - - N/A
Elk Run 78,148 16,526 61,622 51,704 13,210 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Green Valley 9,117 - 9,117 9,117 12,903 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Independence 58,994 7,455 51,539 8,801 13,011 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Logan County 89,457 18,492 70,965 51,240 12,889 Low Sulfur Utility
Low Sulfur Industrial
Marfork 73,221 33,803 39,418 17,064 13,602 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Nicholas Energy 108,107 50,991 57,116 28,387 12,579 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Omar 35,946 16,045 19,901 444 12,937 Low Sulfur Utility
Low Sulfur Industrial
Performance 38,192 5,188 33,004 19,792 13,752 High Vol Met
Progress 92,748 11,460 81,287 60,309 11,880 Low Sulfur Utility
Low Sulfur Industrial
Rawl 113,460 36,870 76,589 53,876 12,784 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Stirrat 5,482 - 5,482 5,482 13,087 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Kentucky
--------
Long Fork 5,616 3,728 1,888 - 12,809 Low Sulfur Utility
Low Sulfur Industrial
Martin County 46,752 35,888 10,864 3,515 12,724 Low Sulfur Utility
Low Sulfur Industrial
New Ridge - - - - - N/A
Sidney 162,703 63,165 99,538 63,639 13,170 Low Sulfur Utility
Low Sulfur Industrial
High Vol Met
Virginia
--------
Knox Creek 54,333 - 54,333 54,333 13,351 High Vol Met
Low Sulfur Utility
Low Sulfur Industrial
Other 91,683 27,433 64,249 58,000 12,999 Various
--------- ------- ------- -------
Subtotal 1,427,504 455,282 972,221 662,352
20
Land Management Companies: (4)
--------------------------
Black King 60,764 37,821 22,942 19,730 12,365 High Vol Met
Low Sulfur Utility
Boone East 212,483 37,299 175,184 60,831 13,202 High Vol Met
Low Sulfur Utility
Low Vol Met
Boone West 258,397 137,300 121,097 81,277 13,047 High Vol Met
Low Sulfur Utility
Ceres Land 12,397 3,807 8,589 8,589 13,730 High Vol Met
Low Sulfur Utility
Lauren Land 142,640 45,123 97,517 79,772 13,137 High Vol Met
Low Sulfur Utility
New Market Land 60,202 5,046 55,156 55,156 14,423 Low Vol Met
High Vol Met
Raven Resources 31,890 18,483 13,407 4,069 13,683 High Vol Met
------------------------------------------------------------
Subtotal 778,773 284,879 493,892 309,424
-----------------------------------------------------------
Total 2,206,278 740,161 1,466,113 971,776
===========================================================
Notes:
(1) Reserve information reflects a moisture factor of 6.5%. This moisture factor
represents the average moisture present on the Company's delivered coal.
(2) Compliance coal is any coal that emits less than 1.2 pounds of sulfur
dioxide per million Btu when burned. Compliance coal meets sulfur emission
standards imposed by Title IV of the Clean Air Act.
(3) Reserve holdings include 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 electricity generation.
(4) Land management companies are Massey subsidiaries whose primary purposes are
to acquire and hold Massey's reserves.
21
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
Shareholder Derivative Suit
On August 5, 2002, a shareholder derivative complaint was filed in the
Boone County, West Virginia, Circuit Court naming as defendants the Company,
each of the Company's directors (including Don L. Blankenship, Chairman,
President and Chief Executive Officer), James L. Gardner, Executive Vice
President and Chief Administrative Officer, Jeffrey M. Jarosinski, Vice
President -Finance and Chief Financial Officer, Madeleine M. Curle, Vice
President - Human Resources, and Bennett K. Hatfield, former Executive Vice
President and Chief Operating Officer. The complaint alleges (i) breach of
fiduciary duties against all of the defendants for refusing to cause the Company
to comply with environmental, labor and securities laws, and (ii) improper
insider trading by Don L. Blankenship, Jeffrey M. Jarosinski, Madeleine M. Curle
and Bennett K. Hatfield. The Company and the other defendants removed the case
to Federal District Court in Charleston, West Virginia, but the case has now
been remanded to the Boone County Circuit Court. The case is still in very early
procedural stages. The Company intends to vigorously pursue defense of this
case.
Force Majeure Litigation
The impoundment failure at Martin County on October 11, 2000 (See Martin
County Impoundment Discharge below in this Item 3), 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 one 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.
22
In addition to the impoundment failure, Massey's operations experienced
various other force majeure events in 2000 and 2001, including:
o Adverse geological conditions in several of the Company's longwall
mines, including severe roof falls that forced the closure of the
Upper Cedar Grove mine of the Independence resource group, flooding
conditions in the Marfork resource group's Ellis Eagle mine, adverse
sandstone intrusions in both the Ellis Eagle and Performance resource
group's Upper Big Branch longwall mines, and a significant roof fall
on the mainline belt and other adverse conditions at the Nicholas
Energy resource group's Jerry Fork longwall;
o Various weather related problems in May, June and July, 2001 which
caused power outages and flooding at several Massey operations;
o Various underground disruptions such as a roof fall that curtailed
transportation of coal from the Independence resource group's Hernshaw
mine to the Elk Run resource group's Chess Processing preparation
plant for approximately six weeks, and subsidence at the Twilight
surface mine of the Progress resource group that covered a highwall
miner for more than three weeks; and
o Labor shortages, especially in trained and qualified underground
workers, particularly electricians.
As a result, Massey declared events of force majeure under a number of its
contracts and sent reduced shipments to its affected customers. The Company was
able to resolve most shortfalls with its customers without dispute. However, the
following disputes occurred:
On April 16, 2002, Appalachian Power Company, a subsidiary of American
Electric Power, filed suit against Massey's subsidiaries Central West
Virginia Energy Company, Massey Coal Sales Company, Inc. and A.T. Massey
Coal Company, Inc. in the Franklin County, Ohio Court of Common Pleas. The
suit alleges that we improperly claimed force majeure with respect to a
tonnage shortfall under our agreements with Appalachian Power in 2000 and
2001. The complaint further alleges that our claim of force majeure
constitutes fraud, and seeks to recover profits made by us on sales to
other customers of the coal Appalachian Power claims should have been
delivered to it. By order entered July 25, 2002, the court dismissed the
fraud claim, however, on December 20, 2002, the court granted Appalachian
Power leave to file a second amended complaint to reassert the fraud claim.
The trial for this matter is currently scheduled for April 28, 2003.
Discovery is ongoing and Appalachian Power has indicated on a preliminary
basis that it intends to seek approximately $20.3 million in damages.
On December 14, 2001, Duke Energy made a demand for arbitration,
disputing our claim that an event of force majeure had occurred and
claiming $20.5 million in damages resulting from coal tonnage shortfalls.
On January 23, 2003, the arbitrators awarded Duke Energy $10.6 million on
its claim, which was recorded as a charge to cost of produced coal revenue
in the fourth quarter of 2002.
Clean Water Act Proceeding
On August 30, 2002, charges were filed in the United States District Court
for the Southern District of West Virginia alleging that Massey's Independence
and Omar subsidiary operations had negligently violated the Clean Water Act. On
December 16, 2002, Independence and Omar each pled guilty to the charges and
each agreed to pay a $200,000 fine and to a probation period of five years for
the violations. Sentencing was completed accordingly on March 12, 2003.
Harman Case
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
June 1998, Harman filed a breach of contract action against Wellmore in Buchanan
County, Virginia, Circuit Court. Harman claimed that Wellmore breached the CSA
by declaring a force majeure event and reducing the amount of coal to be
purchased from Harman. On August 24, 2000, a jury found that Wellmore had
breached its contract and awarded Harman $6 million in damages. After
unsuccessfully pursuing an appeal, on November 12, 2002, Massey paid Harman $6.0
million plus post-judgment interest of approximately $1.2 million, in full
satisfaction of the judgment.
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. On August 1, 2002, the jury in the case
awarded the plaintiffs $50 million in compensatory and punitive damages. Massey
is vigorously pursuing post-judgment 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. The Company accrued a liability
with respect to these cases of $31.0 million, excluding interest, which the
Company believes is a fair estimate of the eventual total payout relating to
both the Virginia and West Virginia actions. After the payment of the Virginia
verdict, the remaining accrual is $25.0 million as of December 31, 2002, which
is included in "Other current liabilities."
23
Water Claims Litigation
Two cases were filed in the Mingo County, West Virginia Circuit Court
alleging that Massey's Delbarton subsidiary's mining activities destroyed nearby
resident plaintiffs' water supplies. One case was filed on behalf of 54
plaintiffs on July 26, 2002, and the other was filed on behalf of 134 plaintiffs
on July 1, 2002. Delbarton has already provided many of the plaintiffs with a
replacement water source. These cases are in early procedural stages and the
trial is scheduled for October 2003.
Elk Run Dust Case
On February 2, 2001, approximately 160 residents of the Town of Sylvester,
West Virginia, filed suit in the Circuit Court of Boone County, West Virginia
against the Company and its subsidiary, Elk Run Coal Company, Inc., alleging
that Elk Run's operations create noise, light and dust constituting a nuisance
and causing damage to the community and seeking to recover compensatory and
punitive damages. On February 7, 2003, a jury awarded approximately $475,000 in
compensatory damages to the plaintiffs but rejected the plaintiffs' request for
punitive damages. The plaintiffs' claim for attorneys' fees is pending. Upon
entry of a final order, either party has four months to appeal the case to the
West Virginia Supreme Court of Appeals. At Decemeber 31, 2002, the Company had
recorded reserves for the verdict and the Company's best estimate of the
plantiffs' claim for attorneys' fees.
West Virginia Flooding Cases
Five of the Company's subsidiaries have been named, among others, in 17
separate complaints filed in Boone, Fayette, Kanawha, McDowell, Mercer, Raleigh
and Wyoming Counties, West Virginia. These cases collectively include numerous
plaintiffs who filed suit on behalf of themselves and others similarly situated,
seeking damages for property damage and personal injuries arising out of
flooding that occurred in southern West Virginia in July of 2001. The plaintiffs
have sued coal, timber, railroad and land companies under the theory that
mining, construction of haul roads and removal of timber caused natural surface
waters to be diverted and interrupted in an unnatural way, thereby causing
damage to the plaintiffs. The West Virginia Supreme Court has ruled that these
cases, including several additional flood damage cases not involving the
Company's subsidiaries, be handled pursuant to the Court's Mass Litigation
rules. As a result of this ruling, the cases have been transferred to the
Circuit Court of Raleigh County in West Virginia to be handled by a panel
consisting of three circuit court judges. The panel will, among other things,
determine whether the individual cases should be consolidated or returned to
their original circuit courts. While the outcome of this litigation is subject
to uncertainties, based on our preliminary evaluation of the issues and the
potential impact on us, we believe this matter will be resolved without a
material adverse effect on our cash flows, financial condition or results of
operations.
Sidney Spill
On April 9, 2002, the rupture of a pipe at Massey's Sidney Coal Company,
Inc. subsidiary caused the discharge of approximately 135,000 gallons of coal
slurry into a tributary stream of the Big Sandy River in eastern Kentucky. On
April 23, 2002, the WVDEP filed a civil action against the Company and its
subsidiary, Massey Coal Services, Inc., in connection with the coal slurry
discharge. The lawsuit seeks unspecified damages to compensate for the alleged
destruction of natural resources and the state's costs in responding to the
spill, civil penalties and punitive damages. We are defending this action
vigorously.
Preparation Plant Employees Litigation
Several subsidiaries of the Company, along with several other coal
companies and several chemical companies, are defendants in an action styled
Denver Pettry, et al. v. Peabody Holding Company, et al., filed April 17, 2002
in the Circuit Court of Boone County, West Virginia, in which the plaintiffs
allege that they were excessively exposed to chemicals used in the coal
preparation plants of the defendant coal companies, which were manufactured by
the defendant chemical companies. The plaintiffs are attempting to attain class
action status. The Company believes it has significant defenses to the claims,
and is defending the case vigorously. The case is in early stages of discovery.
On July 25, 2002, one of the Company's insurer's filed a declaratory
judgment action in the U.S. District Court for the Eastern District of Virginia,
seeking a declaration that it has no duty to defend or indemnify the Massey
companies in the Pettry action. On October 2, 2002, the Massey companies filed
suit seeking a declaratory judgment in the Circuit Court of Boone County, West
Virginia against that insurer and others that provided policies to the Massey
companies that may cover the Pettry claims, and filed a motion to dismiss the
action filed in Virginia. On February 25, 2003, the U.S. District Court for the
Eastern District of Virginia entered an order dismissing the Virginia case. The
West Virginia insurance litigation is also in early stages of discovery.
Dotco Energy Company
On June 14, 1999, Dotco Energy Company, Inc. filed suit against Rawl Sales
& Processing Co., a subsidiary of the Company, in the Circuit Court of Pike
County, Kentucky, alleging that Rawl miscalculated the payment that should have
been made to Dotco for coal delivered to Rawl from years 1980 through 1996, when
Dotco was a contract miner for Rawl. The complaint alleges that the wrongful
calculations resulted in nonpayment for 263,117 tons of coal, for which
allegedly $4,736,109 is due. The complaint also alleged fraud and asserted a
claim for punitive damages. Subsequent rulings by the Court dismissed the fraud
claim and the claim for punitive damages. Rawl has asserted a counterclaim for
advances in the amount of $375,862. The Company believes Rawl has valid defenses
to the claim and is defending the case vigorously. Trial is scheduled to begin
July 22, 2003.
Environmental Show Cause Orders
Regulatory authorities implementing SMCRA may order surface mining permit
holders to "show cause" why their permits should not be suspended or revoked
because of alleged patterns of violations. 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. Under these "show cause orders," if a pattern of violations is
found and determined to have been caused by the willful or unwarranted conduct
of the Company under the surface mining laws, its surface mining permits may be
either suspended or revoked.
Some of the Company's subsidiaries have been issued show cause orders that
are currently unresolved. The Company denies that the violations cited in the
orders were willful or unwarranted and feels that the alleged violations were
promptly remedied or abated. The Company's affected subsidiaries are vigorously
defending these enforcement actions. The Company does not expect that these
actions, either individually or collectively, will have a material impact on its
results of operations, financial position or cash flows. These proceedings are
disclosed solely because they may result in monetary sanctions of more than
$100,000. The particular proceedings affecting Massey subsidiaries are listed
below:
On June 27, 2000, the WVDEP issued an administrative order to Massey's Elk
Run Coal Company subsidiary 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
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 January 2, 2002, the West Virginia Division of Environmental Protection
("WVDEP") entered an order finding that two violations relating to water quality
constituted a pattern and suspended an idled Green Valley Coal Company refuse
area permit for three days. Green Valley obtained a stay of the order and
appealed to the West Virginia Surface Mine Board (the "Surface Mine Board"),
where the order was overturned on June 7, 2002.
24
On January 14, 2002, WVDEP entered an order finding that seven violations
relating to water quality constituted a pattern and suspended operations on
Marfork Coal Company, Inc.'s refuse impoundment permit for 14 days. Marfork
obtained a stay of enforcement of the order pending appeal to the Surface Mine
Board, which heard the appeal, and on June 27, 2002, reduced the suspension to
nine days. Marfork appealed the Surface Mine Board decision to the Circuit Court
of Raleigh County, which stayed the suspension pending appeal. Subsequently, on
December 23, 2002, the circuit court reversed the order on the grounds that
Marfork was not given an unbiased hearing by the WVDEP and remanded the matter
to WVDEP for a new hearing. WVDEP has not yet set a new hearing or appealed the
circuit court order.
On February 19, 2002, WVDEP issued an order to Omar Mining Company to show
cause why its permit for a refuse area and preparation plant should not be
suspended or revoked due to an alleged pattern of four notices of violation and
two cessation orders relating to drainage control and effluent limits. Omar had
a hearing to show cause on January 13 and 14, 2003, but WVDEP has not yet issued
its decision.
On April 22, 2002, WVDEP entered an order to Independence Coal Company
finding that: three notices of violation and three cessation orders relating to
sediment control constituted a pattern at Independence's preparation plant
permit; two notices of violation and one cessation order relating to effluent
limits, refuse placement and sediment control constituted a pattern at
Independence's Jake Gore coal refuse impoundment; and three notices of violation
and one cessation order relating to drainage control on its Justice mine permit
constituted a pattern at Independence's Justice longwall mine. WVDEP ordered a
suspension at the preparation plant for 16 days, the Jake Gore coal refuse
impoundment for 12 days and the Justice longwall mine for seven days. The
suspensions were appealed to the Surface Mine Board. On September 13, 2002, the
Surface Mine Board reduced the preparation plant permit suspension to 12 days
and overturned the suspensions related to the Jake Gore coal refuse impoundment
and the Justice longwall permits. Independence appealed the suspension of the
preparation plant permit to the Circuit Court of Boone County, West Virginia,
and the suspension has been temporarily stayed pending the circuit court's
decision. In its appeal, Independence has raised the same due process arguments
that were successful in the Marfork appeal.
On August 7, 2002, WVDEP issued an order to Massey's Green Valley Coal
Company subsidiary to show cause why its permit for an active refuse disposal
area should not be suspended or revoked due to alleged pattern of three
violations relating to sediment control. Green Valley has requested a hearing to
show cause, but a hearing has not yet been scheduled.
On September 24, 2002, WVDEP issued an order to Massey's Bandmill Coal
Corporation subsidiary to show cause why its permit for an inactive surface mine
should not be suspended or revoked due to an alleged pattern of four violations
and one cessation order relating to sediment control, effluent limits, and
hydrologic impacts. Bandmill has requested a hearing to show cause, but a
hearing has not yet been scheduled.
On October 29, 2002 WVDEP issued an order to Massey's Bandmill Coal Company
subsidiary to show cause why its permit for its refuse area should not be
suspended or revoked due to an alleged pattern relating to one cessation order
and three violations issued with respect to impacts to hydrologic balance,
effluent limits, disturbances to hydrologic balance, slurry injection and refuse
placement. Bandmill has requested a hearing to show cause, but none has been
scheduled.
On October 29, 2002 WVDEP issued an order to Massey's Alex Energy, Inc.
subsidiary to show cause why its permit for a surface mine that has completed
mining and is undergoing reclamation should not be suspended or revoked due to
an alleged pattern of three violations and one cessation order for effluent
limits and hydrologic balance requirements. Alex Energy has requested a hearing
to show cause, but none has been scheduled.
On October 29, 2002 WVDEP issued an order to Massey's Independence Coal
Company subsidiary to show cause why its permit for its Twilight Surface Mine
should not be suspended or revoked due to an alleged pattern of ten violations
relating to off-site impacts, drainage control, disturbed acreage limitations,
soil handling, groundwater protection plans and general permit conditions.
Independence has requested a hearing to show cause, but none has been scheduled.
On November 14, 2002, WVDEP issued an order to Alex Energy's active South
Surface Mine alleging a pattern with respect to four violations and one
cessation order relating to impacts from mud and downslope placement of
material. Alex Energy has requested a hearing, but none has been scheduled.
On November 14, 2002, WVDEP issued an order to Alex Energy's active South
Surface Mine alleging a pattern with respect to seven violations concerning
sediment control, an unpermitted borehole and a leaking oil tank. Alex Energy
has requested a hearing, but none has been scheduled.
25
On January 27, 2003, the Kentucky Natural Resources and Environmental
Protection Cabinet issued a show cause order to an inactive mine site currently
undergoing reclamation at Martin County Coal Corporation. The order alleged a
pattern of violations and lists 27 violations that "contributed to" the pattern,
including eight violations for sediment control, eight violations for off-permit
disturbances, three violations relating to steep slopes standards, two
violations of backfilling/grading standards, two violations for diversions and
one violation each for contemporaneous reclamation, signs/markers, excess spoil
disposal and water quality/effluent limitations standards. The Cabinet states in
its order that it considers the sediment control, diversion, excess spoil and
water quality effluent limitation to be "related" because of impacts or
potential impacts to state waters. The violations were issued from January 19,
1999 through July 24, 2002 and it is unclear what one year time period the
pattern encompasses. The order states that the Cabinet recommends revoking the
permit and forfeiting the bond; however, based on conversations with Cabinet
officials, it appears that the Cabinet does not necessarily intend that the show
cause order impact the ability of MCCC or affiliated companies to obtain permits
in the future.
On February 18, 2003, WVDEP issued an order to Alex Energy's active North
Surface Mine alleging a pattern with respect to two citations and one cessation
order concerning sediment control and impacts to the hydrologic balance. Alex
Energy has requested a hearing, but none has been scheduled.
The potential impact on operations from a permit suspension in the show
cause proceedings varies. For example, some of the operations are not currently
mining or processing coal; therefore, a suspension at those operations would not
impact earnings. At the active 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 because the outcome of these matters
cannot be reasonably estimated. The cost of defending these matters is not
material.
If a company has its permit revoked and its bond forfeited, it may be
prohibited from obtaining permits for future operations. Additionally, pursuant
to the ownership and control provisions of the surface mining laws, operations
affiliated with that company may also be deemed ineligible to receive new
permits. An inability to receive permits necessary to mine would be material.
The Company does not expect that any of these proceedings will result in permit
revocation or bond forfeiture.
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 which are regularly reviewed with the
Public and Environmental Policy Committee, hired an impoundment compliance
officer and implemented an improved environmental management system.
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 complete. As of December 31, 2002, Massey incurred a total
of approximately $58.3 million of cleanup costs in connection with the spill,
$52.2 million of which have been paid directly 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. Most of the claims, fines, penalties and
lawsuits from the impoundment failure have been satisfied or settled. The
remaining issues (none of which is considered material) are:
(1) there are two remaining suits with 8 plaintiffs (one seeking class
certification) seeking various unquantified damages allegedly
resulting from the October 11, 2000 incident.
(2) 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. The court ruled that
WVDEP cannot collect statutory penalties, but has not yet ruled
whether WVDEP can continue to assert its claims for punitive damages.
Massey is continuing to defend this action vigorously and believes
that it has numerous valid defenses to the claims.
(3) 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 penalty amount.
(4) On October 11, 2002, the Town of Fort Gay, West Virginia filed suit
against the Company and Martin County Coal Corporation, alleging that
it's water treatment and distribution plant was damaged when water,
allegedly damaged by the discharge from the Martin County impoundment,
was pumped into the facility. Massey denies the allegations and is
defending the action vigorously.
26
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.
MSHA Proceedings
In September 2002, MSHA petitioned the Federal Mine Safety and Health
Commission to assess Massey's Independence Coal Company subsidiary $275,000 for
alleged violations relating to a roof fall fatality at Independence's Cedar
Grove Mine. Independence has challenged the petition before the Commission.
In October 2002, the MSHA petitioned the Federal Mine Safety and Health
Commission to assess Massey's Independence Coal Company subsidiary $165,000 for
alleged violations relating to a roof fall fatality at Independence's Justice
No. 1 Mine. Independence has challenged the petition before the Commission.
Trucking Litigation
On January 7, 2003, Coal River Mountain Watch, an advocacy group
representing local residents in the Counties of Boone, Raleigh and Kanawha, West
Virginia, and other plaintiffs, filed suit in the Circuit Court of Kanawha
County, West Virginia against various coal and transportation companies
(including various Massey subsidiaries) alleging that the defendants illegally
transport coal in overloaded trucks causing damage to state roads and
interfering with the plaintiffs' use and enjoyment of their properties and their
right to use the public roads, and seeking injunctive relief and damages
(including punitive damages).
Other Legal Proceedings
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, it does not believe that any
liability arising from these matters individually or in the aggregate should
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 December 31, 2002.
27
The current executive officers of Massey are:
Don L. Blankenship, Age 52
Mr. Blankenship has been a Director since 1996 and the Chairman, Chief
Executive Officer and President of Massey since November 30, 2000. He has been
Chairman, Chief Executive Officer and President 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 and the Governor's Mission West Virginia and a
member of the Norfolk Southern Advisory Board.
James L. Gardner, Age 51
Mr. Gardner has been Executive Vice President and Chief Administrative
Officer of Massey and A.T. Massey since July 1, 2002. From February 26, 2000 to
June 30, 2002, he was engaged in the private practice of law as a sole
practitioner. Mr. Gardner first joined A.T. Massey in 1993 as General Counsel
and served in that position until February 25, 2000. Mr. Gardner also served as
a director of Massey from November 30, 2000 until August 1, 2002.
H. Drexel Short, Age 46
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.
Kenneth J. Stockel, Age 56
Mr. Stockel has been Senior Vice President and Chief Financial Officer since
December 9, 2002. Prior to joining Massey, he served as Vice President - Finance
& Administration at Sequent Energy Management in Houston, Texas, the
non-regulated asset management affiliate of AGL Resources Inc. Prior to joining
AGL Resources in 2000, Mr. Stockel was Chief Financial Officer at British Borneo
USA, also in Houston, beginning in April 1998. Previously, he held positions of
increasing responsibility in accounting and finance at Basis Petroleum and
Philipp Brothers, affiliates of Salomon Inc. in New York. He began his career in
the natural resources attestation group at Arthur Andersen in New York City.
R. Eberley Davis, Age 46
Mr. Davis has been Vice President, Secretary and General Counsel since July
15, 2002. Prior to joining Massey, Mr. Davis served as General Counsel for
Lodestar Energy in Lexington, Kentucky. Prior to joining Lodestar in 1993 as
Director of Legal Affairs, Mr. Davis was in private practice in Sturgis,
Kentucky. He began his legal career in 1982 with the Morganfield, Kentucky law
firm of Ruark, Hulette, Arnette & Davis.
Jeffrey M. Jarosinski, Age 43
Mr. Jarosinski has been Chief Compliance Officer of Massey since December
9, 2002, and Vice President, Finance of Massey since November 30, 2000. He also
has been Vice President, Finance of A.T. Massey since September 1998. From
November 30, 2000 through December 9, 2002, Mr. Jarosinski was Chief Financial
Officer of Massey and served in the same role for A.T. Massey from September
1998 through December 9, 2002. 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 56
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.
(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.
28
(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 February 28, 2003, there were 75,322,095 shares outstanding and
approximately 9,783 shareholders of record of Massey's common stock.
The dividends paid and the stock prices of Massey stock for the past two
fiscal years and the two-month transition period ended December 31, 2001, is set
forth below.
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 (1) $ 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
High Low Dividends
---- --- ---------
Fiscal Year 2002 (2)
Transition Period ended December 31, 2001 $ 20.73 $ 15.53 $ 0.00
Quarter ended March 31, 2002 $ 22.41 $ 13.45 $ 0.04
Quarter ended June 30, 2002 $ 18.70 $ 12.26 $ 0.04
Quarter ended September 30, 2002 $ 12.78 $ 5.15 $ 0.04
Quarter ended December 31, 2002 $ 10.80 $ 4.55 $ 0.04
(1) 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.
(2) On January 1, 2002, Massey changed its fiscal year end from October 31
to December 31. No dividend was declared during the transition period
from October 31, 2001 to December 31, 2001.
The Company's current dividend policy anticipates the payment of quarterly
dividends in the future. The Company is restricted by its credit facilities from
declaring and paying cash dividends in excess of $0.16 per share in any fiscal
year, which dividends shall not exceed $13,000,000 in such fiscal year. There
are no other 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.
Equity Compensation Plan Information
(c)
(a) (b) Number of securities remaining
Number of securities to be Weighted-average available for future issuance
issued upon exercise of exercise price of under equity compensation plans
outstanding options, outstanding options, (excluding securities reflected
Plan Category warrants and rights warrants and rights in column (a))
----------------------------- ------------------------- -----------------------------------
Equity compensation plans approved by 2,314,515 $12.86 4,878,326 (1)
security holders
Equity compensation plans not
approved by security holders - - -
--------- ------ ---------
Total 2,314,515 $12.86 4,878,326
29
(1) The following plans have securities available for future issuance (refer to
column (c)): 1997 Restricted Stock Plan for Non-Employee Directors (156,576
shares remain available for annual grants of restricted stock to
non-employee directors); 1995 Non-Employee Director Stock Program (63,636
shares remain available for initial grants of restricted stock to new
non-employee directors); 1996 Executive Stock Plan (2,728,945 shares remain
available for grants of either restricted stock or options to employees);
and 1999 Executive Performance Incentive Plan (1,929,169 shares remain
available for grants of either restricted stock or options to employees).
Item 6. Selected Financial Data.
SELECTED FINANCIAL DATA (1)
Year Ended Year Ended October 31, Two Months Ended
December 31, December 31, (5)
2002 2001 2000 1999 1998 2001 2000
--------- ----------- ---------- ---------- ----------- ------- -------
CONSOLIDATED STATEMENT OF EARNINGS DATA:
Produced coal revenue $ 1,318.9 $ 1,203.3 $ 1,081.0 $ 1,076.1 $ 1,121.1 $ 204.8 $ 168.8
Total revenue 1,630.1 1,431.9 1,312.7 1,263.0 1,292.4 246.4 200.8
(Loss) Earnings from operations (26.7) 9.5 96.5 137.9 170.1 (19.2) (9.4)
Net (Loss) Earnings (32.6) (5.4) 78.5 102.5 128.3 (14.8) (6.7)
(Loss) earnings per share (2)
Basic and diluted (0.44) (0.07) 1.07 1.40 1.75 (0.20) (0.09)
Dividends declared per share 0.16 0.20 N/A N/A N/A - -
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $ (63.4) $ (84.7) $ 164.8 $ 72.5 $ 33.7 $ (93.3) (45.7)
Total assets 2,241.4 2,271.1 2,183.8 2,008.6 1,866.6 2,272.0 2,191.2
Long-term debt 286.0 300.0 N/A N/A N/A 300.0 300.0
Shareholders' equity 808.2 860.6 1,372.5 1,275.6 1,181.2 849.5 857.5
OTHER DATA:
EBIT $ (26.7) $ 9.5 $ 96.5 $ 137.9 $ 170.1 (19.2) (9.4)
EBITDA (3) 181.0 190.8 267.8 305.5 320.6 12.0 19.4
Tons Sold 42.1 43.7 40.2 37.9 37.6 7.0 6.4
Tons Produced 43.9 45.1 41.5 38.4 38.0 7.0 6.3
Total costs and expenses per ton sold $ 39.33 $ 32.52 $ 30.22 $ 29.71 $ 29.85 $ 38.10 $ 32.86
Average cash cost per ton sold (4) 28.90 24.33 21.74 21.40 22.22 28.61 23.95
Produced coal revenue per ton sold 31.30 27.51 26.86 28.40 29.83 29.36 26.39
Capital expenditures $ 135.1 $ 247.5 $ 204.8 $ 230.0 $ 307.9 $ 37.7 $ 23.4
Number of employees 4,552 5,004 3,610 3,190 3,094 5,040 3,730
(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
years ended December 31, 2002 and October 31, 2001, and for the two-month
periods ended December 31, 2001 and 2000, 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.
30
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
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.
Year ended Year ended
December 31, October 31,
---------------- ----------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------- ----------------- ----------------- ----------------- ----------------
$ per ton $ per ton $ per ton $ per ton $ per ton
------- -------- -------- -------- ------- --------- -------- -------- ------- ---------
Total Costs and $1,656.8 $39.33 $1,422.3 $32.52 $1,216.2 $30.22 $1,125.1 $29.71 $1,122.3 $29.85
Expenses
Less: Freight and
handling costs 112.0 2.66 129.9 2.97 131.3 3.26 106.2 2.80 130.7 3.48
Less: Cost of
purchased coal
revenue 119.6 2.84 47.0 1.08 38.9 0.97 41.2 1.09 5.5 0.15
Less: Depletion,
Depreciation and
Amortization 207.7 4.93 181.3 4.14 171.3 4.25 167.6 4.42 150.5 4.00
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Average Cash Cost $1,217.5 $28.90 $1,064.1 $24.33 $874.7 $21.74 $ 810.1 $21.40 $835.6 $22.22
Two Months ended
December 31,
---------------------------------
2001 2000
---------------- ----------------
$ per ton $ per ton
------- -------- -------- --------
Total Costs and $265.7 $38.10 $210.2 $32.86
Expenses
Less: Freight and
handling costs 18.9 2.71 21.9 $ 3.41
Less: Cost of
purchased coal
revenue 16.1 2.31 6.3 0.99
Less: Depletion,
Depreciation and
Amortization 31.2 4.47 28.8 4.51
------ ------ ------ ------
Average Cash Cost $199.5 $28.61 $153.2 $23.95
(5) The Company changed to a calendar-year basis of reporting financial results
effective January 1, 2002. For comparative purposes, the selected financial
data reported for 1998 through 2001 is for the twelve months and periods
then ended, October 31. As a requirement of the change in fiscal year, the
Company is reporting results of operations and cash flows for a special
transition period for the two months ended December 31, 2001 compared with
the two-months ended December 31, 2000. Additionally, other selected
financial data is presented as of and for the two months ended December 31,
2001 and December 31, 2000.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Effective January 1, 2002, the Company changed to a calendar-year basis of
reporting financial results. For comparative purposes, the reported audited
consolidated results of operations and cash flows for the 2001 and 2000 annual
periods are for the twelve months ended October 31. As a requirement of the
change in fiscal year, the Company is reporting consolidated results of
operations and cash flows for a special transition period, the two months ended
December 31, 2001 (audited) compared with the two months ended December 31, 2000
(unaudited). The comparative audited balance sheets are as of December 31, 2002
and October 31, 2001.
Results of Operations
2002 Compared with 2001
Produced coal revenue for the year ended December 31, 2002, increased 10
percent to $1,318.9 million compared with $1,203.3 million for the year ended
October 31, 2001. Two factors that impacted produced coal revenue for 2002
compared to 2001 were:
o The volume of produced tons sold decreased 4 percent to 42.1 million
tons in 2002 from 43.7 million tons in 2001, attributable to a
reduction in metallurgical and industrial tons sold of 18 and 13
percent, respectively; and
o The produced coal revenue per ton sold increased 14 percent to $31.30
per ton in 2002 from $27.51 per ton in 2001, consisting of 17, 14, and
13 percent increases to the prices for utility, metallurgical and
industrial coal, respectively.
Realized prices for our produced tonnage sold in 2002 reflected the
improvement seen in the market during 2001, as spot market prices of Central
Appalachian coal increased to 20-year highs, and we were able to obtain sales
commitments at relatively higher prices. However, during 2002 the soft economic
environment, weak steel demand and the higher stockpiles built by the utilities
due to the unusually mild weather that prevailed in the Eastern United States
during the winter of 2001 - 2002 significantly reduced demand for all grades of
coal.
31
Freight and handling revenue decreased 14 percent to $112 million in 2002
compared with $129.9 million in 2001.
Revenue from purchased coal sales increased $67.5 million, or 58 percent,
from $49.5 million in 2001 to $117 million in 2002. This increase was due to an
increase in purchased tons sold, which grew by 2 million tons to 3.3 million in
2002 from 1.3 million in 2001. Massey purchases varying amounts of coal each
year to supplement produced coal.
Other revenue, which consists of royalties, rentals, coal handling facility
fees, gas well revenue, synfuel earnings, gains on the sale of non-strategic
assets, contract buyout payments, and miscellaneous income, increased to $78.8
million for 2002 from $49.2 million for 2001. The increase was primarily due to
2002 contract buyout payments of $23.5 million from several customers, including
$5.1 million from one large customer, as well as increased earnings related to
the sale of an interest in, and the operation of, Appalachian Synfuel, LLC. The
contract buyout payments in 2002 were a result of several customers negotiating
settlement of above market price contracts for 2002 tonnage in lieu of accepting
delivery.
Cost of produced coal revenue increased approximately 14 percent to
$1,177.4 million for 2002 from $1,032.4 million for 2001. Cost of produced coal
revenue on a per ton of coal sold basis increased by 18 percent in 2002 compared
with 2001. This increase was partially due to a pre-tax charge taken in the
second quarter of 2002 in the amount of $25.6 million related to an adverse jury
verdict in the West Virginia Harman Mining Corporation lawsuit, as well as a
fourth quarter charge of $10.6 million related to an arbitration award in a
contract dispute. Additionally, the reduction in tons sold, poor productivity at
our longwalls, as well as at some room and pillar and surface mining operations,
and higher wage and benefit costs contributed to the increase. During 2001, in
response to the market improvement, we increased staffing and benefits costs in
order to increase production. However, due to the subsequent market weakness, we
reduced total workforce during the first quarter of 2002 by approximately 7
percent and idled 15 continuous miner sections. Cost of produced coal revenue
for 2001 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 $9.5 million pre-tax refund related to
black lung excise taxes paid on coal export sales tonnage. Tons produced in 2002
were 43.9 million compared to 45.1 million in 2001.
Freight and handling costs decreased 14 percent to $112 million in 2002
compared with $129.9 million in 2001.
Costs of purchased coal revenue increased $72.5 million to $119.5 million in
2002 from $47 million in 2001. This was due to the 2 million ton increase in
purchased tons sold to 3.3 million in 2002 from 1.3 million in 2001, as well as
the higher cost per ton paid for the purchased coal.
Depreciation, depletion and amortization (DD&A) increased by approximately
15 percent to $207.7 million in 2002 compared to $181.3 million for 2001. The
increase of $26.4 million was primarily due to a $13.2 million (pre-tax)
write-off of mine development costs at certain idled mines in 2002, as well as
increased capital expenditures made in recent years in an effort to increase
production.
Selling, general and administrative expenses were $40.1 million for 2002
compared to $31.7 million for 2001. The increase was primarily attributable to
increases in accruals related to long-term executive compensation programs and
costs of legal services, offset by a reduction in bad debt reserves for a
receivable from a large bankrupt customer, Wheeling-Pittsburgh Steel
Corporation, which totaled $2.5 million (pre-tax) during the first quarter of
2002.
Interest income decreased to $4.5 million for 2002 compared with $8.7
million for 2001. This decrease was due to $3.2 million (pre-tax) of interest
income in 2001 for interest due on the black lung excise tax refund.
Interest expense increased to $35.3 million for 2002 compared with $34.2
million for 2001. The higher interest expense was due to interest of $1.2
million (pre-tax) paid in the fourth quarter of 2002 on the judgment in the
Virginia Harman Mining Corporation action after the dismissal of the appeal in
the third quarter of 2002.
Income tax benefit was $24.9 million for 2002 compared with income tax
benefit of $10.5 million for 2001. The 2002 benefit includes a refund for the
settlement of a state tax dispute in the amount of $2.4 million, net of federal
tax.
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.
32
o The produced coal revenue per ton sold increased by 2 percent from
$26.86 in 2000 to $27.51 in 2001.
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 to $23.65 for the fiscal year 2001 compared to $20.82 in 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 sales.
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 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.
33
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.
Liquidity and Capital Resources
At December 31, 2002, the Company's available liquidity was $134.5 million,
including cash and cash equivalents of $2.7 million and $131.8 million
availability under the Company's revolving credit facilities. At December 31,
2002, Massey had $264.0 million outstanding under its credit facilities, which
is included in short-term debt. In early May 2002, Moody's and S&P downgraded
our credit ratings. These ratings actions effectively prevented us from
accessing the commercial paper market due to the restrictive investment policy
credit guidelines of potential commercial paper investors and caused us to draw
on the credit facilities for short-term financing needs. No commercial paper
obligations were outstanding at December 31, 2002.
On November 26, 2002, Massey and its lenders concluded the extension and
amendment of the $150 million 364-day and $250 million multi-year revolving
credit facilities, which have been guaranteed by A. T. Massey, that serve as the
primary source of our short-term liquidity. The credit facilities now provide
the lenders with selected assets as collateral for borrowings under the
facilities. The selected assets that are collateral for the credit facilities
include all capital stock of the Company's subsidiaries and substantially all of
the Company's assets, now owned or at any time hereafter acquired by the
Company, excluding among other things, all coal, oil and gas reserves and mining
permits, certain properties (e.g., the Eastman Chemical Company Coal Handling
System and Westvaco Coal Handling Facility, and the value of properties that
might exceed the lien threshold established in the indenture related to the
Senior Notes (discussed below)) and certain other assets associated with the
Company's accounts receivable securitization program discussed below. Both
facilities have been renewed through November 25, 2003. The Company intends to
replace these credit facilities prior to their expiration on November 25, 2003.
Borrowings under these facilities bear interest based on (i) the London
Interbank Offer Rate (LIBOR) or (ii) the Base Rate (as defined in the facility
agreements) plus a margin, which is based on the Company's senior secured debt
credit rating as determined by Moody's and Standard & Poor's. At December 31,
2002, and currently, Massey's senior secured debt ratings are Ba1 and BB+,
respectively.
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 December 31, 2002 and during
other periods reflected except for the covenant related to the maximum leverage
ratio, with which we were not in compliance at December 31, 2001. However, the
participant banks granted a waiver of this financial covenant for the period
ended December 31, 2001. In the event we violate any of the debt covenants and
do not affect a timely cure or receive a waiver from the lenders in our credit
facilities, the debt agreements provide that the Administrative Agent shall, if
requested by at least four lenders holding at least 50% of the aggregate amount
of the loans, declare the loans immediately due and payable.
In determining EBITDA as defined in the credit facility agreements for use
in computing the leverage ratio, the Company has excluded certain items,
including the $25.6 million reserve relative to the Harman litigation described
in Note 15. The Company believes that the exclusion of such items is appropriate
and has notified the lenders' Administrative Agent of this exclusion. If the
accrual for the Harman litigation were to be included in the EBITDA calculation
and no further adjustments were made, the Company would still be in compliance
with the covenant at December 31, 2002. For further detail on the financial
covenants, see Section 5.02 of the Amended and Restated Credit Agreement, which
is included as Exhibit 10.1 to this Form 10-K.
The Company had $286.0 million of long-term debt as of December 31, 2002,
which consisted entirely of 6.95 percent Senior Notes (the "Notes") due March 1,
2007. Initially, $300 million of the Notes were issued in March 1997 at a
discount, for aggregate proceeds of $296.7 million. During the fourth quarter of
2002, the Company made several open-market purchases, retiring a total principal
amount of $14.0 million Senior Notes at a cost of $10.7 million plus accrued
interest. 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. On
November 27, 2002, Moody's and S&P reduced the credit ratings on the Senior
Notes to Ba3 and B+, respectively, citing the structural subordination caused by
the secured status of the amended bank credit facilities.
34
Additionally, the Company has available a $500 million debt shelf
registration filed with the Securities and Exchange Commission (the "SEC") in
March 1999, all of which remains unused. Prior to the spin-off, Fluor
Corporation filed this debt shelf registration. An updated filing with the SEC
would be required to issue debt under this shelf registration.
In December 2002, the Company generated cash flow of $17 million from the
sale and leaseback of mining equipment. In January 2003, the Company implemented
an accounts receivable securitization program that will allow it to generate
cash of up to $80 million based on the amount of accounts receivable
outstanding. The cash generated from both the sale leaseback and securitization
programs will reduce capacity under the Company's main credit facility by 25% of
the proceeds.
The total debt-to-book capitalization ratio was 40.5 percent at December
31, 2002 compared to 38.8 percent at October 31, 2001. The cash flow provided by
operating activities was $122.5 million in 2002 and $172.8 million for the
fiscal year ended October 31, 2001. 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 $122.0
million in 2002 and $212.6 million for the fiscal year ended October 31, 2001.
The cash used in investing activities reflects capital expenditures in the
amount of $135.1 million and $247.5 million in the years ended December 31, 2002
and October 31, 2001, respectively. These capital expenditures are for
replacement of mining equipment, the expansion of mining capacity and projects
to improve the efficiency of mining operations. Net cash utilized in financing
activities was $3.3 million in 2002 compared to net cash provided by financing
activities of $38.6 million in 2001. Financing activities in 2001 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, the net cash utilized in financing activities in 2002 also includes
$17 million of proceeds from a sale-leaseback transaction, as well as $10.7
million utilized to repurchase a portion of our outstanding Senior Notes. In
addition to the cash spent on capital expenditures during the year of 2001, the
Company leased, through operating leases, $10.6 million and $109.0 million of
mining equipment in 2002 and the fiscal year ended October 31, 2001,
respectively.
The cash flow provided by operating activities was $172.8 million in 2001
and $153.7 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
$212.6 million in 2001, and $172.8 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.
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.
The following is a summary of our significant obligations as of December 31,
2002:
Payments Due by Years
------------------------------------------------------------------------------
In thousands Total Within 1 2 - 3 4 - 5 After 5
Year Years Years Years
- ---------------------------------------------------------------------------------------------------------------
Long-term debt $ 286,000 $ - $ - $ 286,000 $ -
Short-term debt 264,045 264,045 - - -
Operating lease obligations 212,342 61,486 106,806 40,987 3,063
--------------- -------------- --------------- --------------- ---------------
Total obligations $ 762,387 $ 325,531 $ 106,806 $ 326,987 $ 3,063
=============== ============== =============== =============== ===============
35
Additionally, we have liabilities relating to other post-employment
benefits, work related injuries and illnesses, and mine reclamation and closure.
As of December 31, 2002, payments related to these items are estimated to be:
Payments Due by Years (In thousands)
- --------------------------------------------------------------------------------
2 - 3 4 - 5
Within 1 Year Years Years
- ------------------------- ------------------------ ----------------------
$ 32,903 $ 65,463 $ 59,031
Our determination of these noncurrent liabilities is calculated annually and
is based on several assumptions, including then prevailing conditions, which may
change from year to year. In any year, if our assumptions are inaccurate, we
could be required to expend greater amounts than anticipated. Moreover, in
particular for periods after 2002, our estimates may change from the amounts
included in the table, and may change significantly, if our assumptions change
to reflect changing conditions. These assumptions are discussed in the notes to
our consolidated financial statements and in the Critical Accounting Estimates
and Assumptions of the Management's Discussion and Analysis of Financial
Condition and Results of Operation section.
Off-Balance sheet arrangements
In the normal course of business, the Company is a party to certain
off-balance sheet arrangements including guarantees, indemnifications, and
financial instruments with off-balance sheet risk, such as bank letters of
credit and performance or surety bonds. Liabilities related to these
arrangements are not reflected in our consolidated balance sheets, and we do not
expect any material adverse effects on our financial condition, results of
operations or cash flows to result from these off-balance sheet arrangements.
The Company uses surety bonds to secure reclamation, workers' compensation,
wage payments, and other miscellaneous obligations. As of December 31, 2002, the
Company had $261 million of outstanding surety bonds with third parties. These
bonds were in place to secure obligations as follows: post-mining reclamation
bonds of $217 million, workers' compensation bonds of $10 million, wage payment
and collection bonds of $9 million, and other miscellaneous obligation bonds of
$25 million. Recently, surety bond costs have increased, while the market terms
of surety bonds have generally become less favorable. To the extent that surety
bonds become unavailable, the Company would seek to secure obligations with
letters of credit, cash deposits, or other suitable forms of collateral.
From time to time the Company uses bank letters of credit to secure its
obligations for worker's compensation programs, various insurance contracts and
other obligations. Issuing banks currently require that such letters of credit
be secured by funds deposited into restricted accounts pledged to the banks
under reimbursement agreements. At December 31, 2002, the Company had $32.5
million of letters of credit outstanding, collateralized by $31.5 million of
cash deposited in restricted, interest bearing accounts, and no claims were
outstanding against those letters of credit.
Inflation
Inflation in the United States has been relatively low in recent years and
did not have a material impact on Massey's cash flows, financial position or
results of operations for the years presented.
Recent Accounting Pronouncements
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 statement is effective for
fiscal years beginning after June 15, 2002 and transition is by cumulative
catch-up adjustment. The Company has adopted SFAS No. 143 on January 1, 2003 and
the adoption will change the Company's current accounting for reclamation. The
Company is continuing to calculate its transition adjustment.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections" ("SFAS No. 145"), which is
effective for fiscal years beginning after May 2002. The standard requires that
gains or losses on debt extinguishment, previously reported as extraordinary
items, be presented as a component of results from continuing operations unless
the extinguishment meets the criteria for classification as an extraordinary
item in Accounting Principles Board Opinion No. 30. During the fourth quarter of
2002, the Company purchased in open market transactions, an aggregate of $14.0
million of its 6.95 percent Senior Notes at an aggregate purchase price of $10.7
million. The Company has chosen early adoption of SFAS No. 145, and accordingly,
recorded a gain on the transactions in Senior notes repurchase income, a
component of Total revenue.
36
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN45"). This Interpretation describes
the disclosure requirements of a guarantor's issuance of certain guarantees, and
clarifies that a guarantor is required to recognize a liability, at the date of
issuance, for the fair value of the obligation assumed in issuing the guarantee.
The disclosure requirements of FIN 45 are effective for the Company for the year
ended December 31, 2002, and the initial recognition and measurement provisions
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. See Note 7 to the Consolidated Financial Statements.
Outlook
Cold winter weather, reductions in utility coal stockpiles and the rising
costs of alternative energy sources, are expected to accelerate demand for coal
in early 2003. Supply constraint and production declines by producers throughout
Central Appalachia should also support coal prices. Nevertheless, the Company
expects a loss in the first quarter of 2003 due to operational disruptions
caused by moving four longwalls to new panels and weather-related production and
shipping issues. The Company currently projects produced coal sales of 40 to 45
million tons in 2003.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
- ---------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect reported amounts. These estimates and
assumptions are based on information available as of the date of the financial
statements. The following critical accounting estimates and assumptions were
used in the preparation of the financial statements:
Defined Benefit Pension
The Company has noncontributory defined benefit pension plans, which cover
substantially all administrative and non-union employees of the Company.
Benefits are generally based on the employee's years of service and
compensation, or under a 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 Company accounts for
its defined benefit plans in accordance with FAS 87, Employer's Accounting for
Pensions, which requires amounts recognized in the financial statements to be
determined on an actuarial basis. The estimated cost and benefits of our
non-contributory defined benefit pension plans are determined by independent
actuaries, who, with our input, use various actuarial assumptions, including
discount rate, future rate of increase in compensation levels and expected
long-term rate of return on pension plan assets. The discount rate is determined
each year at the measurement date. In estimating the discount rate, we look to
rates of return on high-quality, fixed-income investments that receive one of
the two highest ratings given by a recognized ratings agency. At December 31,
2002, the discount rate was determined to be 6.75% compared to the discount rate
at October 31, 2001 of 7.25%. The rate of increase in compensation levels is
determined based upon the Company's long-term plans for such increases. The rate
of increase in compensation levels was determined to be 4% at December 31, 2002,
and October 31, 2001. Expected long-term rate of return on plan assets is based
on long-term historical return information for the mix of investments that
comprise plan assets and future estimates of long-term investment returns. The
expected long-term rate of return on plan assets used to determine expense in
each period was 9.0% and 9.5% for the years ended December 31, 2002 and October
31, 2001, respectively. The Company expects to adjust the expected long-term
rate of return on plan assets to 8.5% for determination of 2003 expense.
Significant changes to these rates introduce substantial volatility to our
costs. The fair value of the defined benefit pension plan assets is an important
factor in the determination of defined benefit pension expense. The fair value
of plan assets at December 31, 2002 was $174 million compared to $196 million at
October 31, 2001, a reduction of $22 million. As a result of the decrease in
discount rate, the reduction in expected long-term rate of return on plan
assets, and the decline in defined benefit pension plan assets during 2002,
costs for the defined benefit pension plans are expected to increase in 2003
compared to 2002 related expense.
Coal Workers' Pneumoconiosis
We are responsible under the Federal Coal Mine Health and Safety Act of
1969, as amended, and various states' statutes, for the payment of medical and
disability benefits to eligible recipients resulting from occurrences of coal
workers' pneumoconiosis disease (black lung). After review and consultation with
us, an annual evaluation is prepared by our independent actuaries based on
assumptions regarding disability incidence, medical costs, mortality, death
benefits, dependents and interest rates. The Company records expense related to
this obligation using the service cost method. The discount rate is determined
each year at the measurement date. At December 31, 2002, the discount rate was
determined to be 6.75% compared to the discount rate at October 31, 2001, of
7.25%. Significant changes to these interest rates introduce substantial
volatility to our costs. In January 2001, the United States Department of Labor
amended the regulations implementing the federal black lung laws to give greater
weight to the opinion of a claimant's treating physician, expand the definition
of black lung disease and limit the amount of medical evidence that can be
submitted by claimants and respondents. The amendments also alter administrative
procedures for the adjudication of claims, which according to the Department of
Labor, results in streamlined procedures that are less formal, less adversarial
and easier for participants to understand. These and other changes to the
federal black lung regulations could result in changes in assumptions used in
our actuarial determination of the liability, including interest, disability and
mortality assumptions. These changes could potentially increase our exposure to
black lung benefits liabilities.
Workers' Compensation
Workers' Compensation is a system by which individuals who sustain physical
or mental injuries due to their jobs are compensated for their disabilities,
medical costs, and on some occasions, for the costs of their rehabilitation, and
by which the survivors of workers who suffer work related deaths receive
compensation for lost financial support. The workers' compensation laws are
administered by state agencies with each state having its own set of rules and
regulations regarding compensation that is owed to an employee that is injured
in the course of employment. Our operations are covered by a combination of
either a self-insurance program, as a participant in a state run program, or by
an
37
insurance policy. We accrue for the self-insured liability by recognizing cost
when it is probable that the liability has been incurred and the cost can be
reasonably estimated. To assist in the determination of this estimated liability
we utilize the services of third party administrators. These third parties
provide information to independent actuaries, who after review and consultation
with us with regards to actuarial rate assumptions, including discount rate,
prepare an evaluation of the self-insured program liabilities. Actual losses
could differ from these estimates, which could increase our costs.
Other Post Employment Benefits
Our sponsored defined benefit health care plans provide retiree health
benefits to eligible union and non-union retirees who have met certain age and
service requirements. Depending on year of retirement, benefits may be subject
to annual deductibles, coinsurance requirements, lifetime limits, and retiree
contributions. These plans are not funded. Costs are paid as incurred by
participants. The estimated cost and benefits of our retiree health care plans
are determined by independent actuaries, who, with our input, use various
actuarial assumptions, including discount rate, expected trend in health care
costs and per capita costs. The discount rate is determined each year at the
measurement date. The discount rate is an estimate of the current interest rate
at which the other post employment benefit liabilities could be effectively
settled at the measurement date. In estimating this rate, we look to rates of
return on high-quality, fixed-income investments that receive one of the two
highest ratings given by a recognized ratings agency. At December 31, 2002, the
discount rate was determined to be 6.75% compared to the discount rate at
October 31, 2001 of 7.25%. Significant changes to these interest rates introduce
substantial volatility to our costs. At December 31, 2002 our assumptions of our
company health care cost trend were projected at an annual rate of 11.0% ranging
down to 5.0% by 2009, and remaining level thereafter, compared to the health
care cost trend rate of 8.0% ranging down to 5.0% by 2007 used at December 31,
2001. If the actual increase in the cost of medical services or other post
retirements benefits are significantly greater or less than the projected trend
rates, the cost assumptions would need to be adjusted which could have a
significant effect on the costs and liabilities recognized in the financial
statements. As a result of the reduction in discount rate discussed above and
the increase in health care cost trend rate, absent any plan changes, costs for
the retiree health benefits plans are expected to increase in 2003 compared to
2002 related expense.
Reclamation and Mine Closure Obligations
The Surface Mining Control and Reclamation Act establishes operational,
reclamation and closure standards for all aspects of surface mining as well as
most aspects of deep mining. Estimates of our total reclamation and mine-closing
liabilities are based upon permit requirements and our engineering expertise
related to these requirements. We accrue for the costs of current mine
disturbance and final mine closure, including the cost of treating mine water
discharge as coal is mined, on a unit-of-production basis over the proven and
probable reserves as defined in Industry Guide 7. The estimate of ultimate
reclamation liability is reviewed annually by our management and engineers. The
estimated liability can change significantly if actual costs vary from
assumptions or if governmental regulations change significantly. Accounting
pronouncement, SFAS No. 143 requires that retirement obligations be recorded as
a liability based on the present value of the estimated cash flows. Further
discussion of the implementation of this new accounting pronouncement can be
found in the previous section "New Accounting Pronouncements."
Contingencies
We are the subject of, or a party to, various suits and pending or
threatened litigation involving governmental agencies or private interests. We
have accrued the probable and reasonably estimable costs for the resolution of
these claims based upon management's best estimate of potential results,
assuming a combination of litigation and settlement strategies. Unless otherwise
noted, management does not believe that the outcome or timing of current legal
or environmental matters will have a material impact to its results of
operations, financial position or cash flows. Also, our operations are affected
by federal, state and local laws and regulations regarding environmental matters
and other aspects of our business. The impact, if any, of pending legislation or
regulatory developments on future operations is not currently estimable.
Deferred Taxes
We account for income taxes in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes" which requires that
deferred tax assets and liabilities be recognized using enacted tax rates for
the effect of temporary differences between the book and tax bases of recorded
assets and liabilities. SFAS No. 109 also requires that deferred tax assets be
reduced by a valuation allowance if it is more likely than not that some portion
of the deferred tax asset will not be realized. At December 31, 2002, we had
deferred tax liabilities in excess of deferred tax assets of approximately $231
million. The deferred tax assets are evaluated annually to determine if a
valuation allowance is necessary. As of December 31, 2002, we had recorded a
valuation allowance of approximately $86 million, primarily related to
alternative minimum tax credits. At December 31, 2002 the Company believes that
it is more likely than not that the net balance of deferred tax assets will be
realized.
38
Coal Reserve Values
There are numerous uncertainties inherent in estimating quantities and
values of economically recoverable coal reserves. Many of these uncertainties
are beyond our control. As a result, estimates of economically recoverable coal
reserves are by their nature uncertain. Information about our reserves consists
of estimates based on engineering, economic and geological data assembled and
analyzed by our staff. Some of the factors and assumptions that impact
economically recoverable reserve estimates include:
- geological conditions;
- historical production from the area compared with production from
other producing areas;
- the assumed effects of regulations and taxes by governmental agencies;
- assumptions governing future prices; and
- future operating costs.
Each of these factors may in fact vary considerably from the assumptions
used in estimating reserves. For these reasons, estimates of the economically
recoverable quantities of coal attributable to a particular group of properties,
and classifications of these reserves based on risk of recovery and estimates of
future net cash flows, may vary substantially. Actual production, revenue and
expenditures with respect to reserves will likely vary from estimates, and these
variances may be material.
Capitalized Development Costs
Development costs applicable to the opening of new coal mines and certain
mine expansion projects are capitalized and reported in property, plant and
equipment. Pursuant to SFAS No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets," the continuing economic viability of capitalized
development costs are assessed when the indicators of impairment exist. This
assessment includes a consideration of the future operating cashflows as
measured using various potential operating plans and market assumptions of
future coal demand and prices.
Item 7A. Quantitative and Qualitative Discussions about Market Risk
Our interest expense is sensitive to changes in the general level of
interest rates in the United States. At December 31, 2002, we had outstanding
$286.0 million aggregate principal amount of long-term debt under fixed-rate
instruments; however, our primary exposure to market risk for changes in
interest rates relates to our short-term financing. At December 31, 2002, we had
$264.0 million outstanding under the revolving credit facilities. At December
31, 2002, the weighted average interest rate of borrowings under the credit
facilities was 3.92 percent. Based on the short-term debt balance outstanding at
December 31, 2002, a 100 basis point increase in the average interest rate for
our borrowings would increase our 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.
We manage our commodity price risk through the use of long-term coal supply
agreements, which are contracts with a term of greater than 12 months, rather
than through the use of derivative instruments. For our fiscal year ended
December 31, 2002, approximately 94% of our coal sales volume was pursuant to
long-term contracts. The Company anticipates that in 2003, the percentage of
sales pursuant to long-term arrangements will be comparable with the percentage
of sales for 2002. The prices for coal shipped under long-term contracts may be
below the current market price for similar types of coal at any given time. As a
consequence of the substantial volume of its sales which are subject to these
long-term agreements, the Company has less coal available with which to
capitalize on stronger coal prices if and when they arise. In addition, because
long-term contracts typically allow the customer to elect volume flexibility,
the Company's ability to realize the higher prices that may be available in the
spot market may be restricted when customers elect to purchase higher volumes
under such contracts, or the Company's exposure to market-based pricing may be
increased should customers elect to purchase fewer tons.
39
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 December 31, 2002 and October 31, 2001, and the related
consolidated statements of income, cash flows, and shareholders' equity for the
year ended December 31, 2002, the two months ended December 31, 2001, and each
of the two years in the period ended October 31, 2001. Our audit also included
the financial statement schedule listed in Item 15(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 at December 31, 2002 and October 31, 2001, and the consolidated results
of its operations and its cash flows for the year ended December 31, 2002, the
two months ended December 31, 2001, and each of the two 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.
/s/ Ernst & Young LLP
Richmond, Virginia
March 26, 2003
40
MASSEY ENERGY COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
Year Ended Two Months Ended
-------------------------------------------- -----------------------------
December 31, October 31, October 31, December 31, December 31,
2002 2001 2000 2001 2000
-------------------------------------------- -----------------------------
(Unaudited)
Revenues
Produced coal revenue $ 1,318,935 $ 1,203,285 $ 1,081,027 $ 204,753 $ 168,809
Freight and handling revenue 112,017 129,894 131,334 18,912 21,893
Purchased coal revenue 117,049 49,485 39,585 16,999 6,301
Other revenue 78,804 49,197 60,752 5,779 3,774
Senior notes repurchase income 3,290 -- -- -- --
--------------- ------------- -------------- -------------- --------------
Total revenues 1,630,095 1,431,861 1,312,698 246,443 200,777
--------------- ------------- -------------- -------------- --------------
Costs and Expenses
Cost of produced coal revenue 1,177,363 1,032,420 839,359 191,957 147,283
Freight and handling costs 112,017 129,894 131,334 18,912 21,893
Cost of purchased coal revenue 119,562 47,030 38,853 16,081 6,301
Depreciation, depletion and amortization
applicable to:
Cost of produced coal revenue 203,921 177,384 169,467 30,293 28,538
Selling, general and administrative 3,809 3,885 1,869 899 293
Selling, general and administrative 40,111 31,702 35,364 7,510 5,888
--------------- ------------- -------------- -------------- --------------
Total costs and expenses 1,656,783 1,422,315 1,216,246 265,652 210,196
--------------- ------------- -------------- -------------- --------------
(Loss) Income from operations (26,688) 9,546 96,452 (19,209) (9,419)
Interest income 4,470 8,747 25,661 987 2,123
Interest expense (35,302) (34,214) (347) (5,302) (3,719)
--------------- ------------- -------------- -------------- --------------
(Loss) Income before taxes (57,520) (15,921) 121,766 (23,524) (11,015)
Income tax (benefit) expense (24,946) (10,501) 43,235 (8,723) (4,296)
--------------- ------------- -------------- -------------- --------------
Net (loss) income $ (32,574) $ (5,420) $ 78,531 $ (14,801) $ (6,719)
=============== ============= ============== ============== ==============
(Loss) Income per share
Basic $ (0.44) $ (0.07) $ 1.07 $ (0.20) $ (0.09)
=============== ============= ============== ============== ==============
Diluted $ (0.44) $ (0.07) $ 1.07 $ (0.20) $ (0.09)
=============== ============= ============== ============== ==============
Shares used to calculate (loss) income per share
Basic 74,442 73,858 73,469 74,131 74,098
=============== ============= ============== ============== ==============
Diluted 74,442 73,858 73,472 74,131 74,098
=============== ============= ============== ============== ==============
See Notes to Consolidated Financial Statements.
41
MASSEY ENERGY COMPANY
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
December 31, October 31,
2002 2001
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 2,725 $ 5,664
Trade and other accounts receivable, less allowance
of $8,775 and $9,848, respectively 175,795 198,885
Inventories 193,669 141,483
Deferred taxes 13,889 13,572
Income taxes receivable 6,437 1,880
Other current assets 117,326 96,034
------------------- ------------------
Total current assets 509,841 457,518
------------------- ------------------
1,534,488 1,613,133
Net Property, Plant and Equipment
Other Noncurrent Assets
Pension assets 77,356 80,400
Other 119,747 120,029
------------------- ------------------
Total other noncurrent assets 197,103 200,429
------------------- ------------------
Total assets $ 2,241,432 $ 2,271,080
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable, principally trade and bank overdrafts $ 124,933 $ 185,903
Short-term debt 264,045 248,231
Payroll and employee benefits 44,389 37,878
Other current liabilities 139,896 70,223
------------------- ------------------
Total current liabilities 573,263 542,235
------------------- ------------------
Noncurrent Liabilities
Long-term debt 286,000 300,000
Deferred taxes 244,676 250,444
Other 329,281 317,796
------------------- ------------------
Total noncurrent liabilities 859,957 868,240
------------------- ------------------
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 - 75,317,732 and 74,543,670 shares, respectively 47,074 46,590
Additional Capital 21,659 15,541
Unamortized executive stock plan expense (6,407) (6,706)
Retained earnings 745,886 805,180
------------------- ------------------
Total shareholders' equity 808,212 860,605
------------------- ------------------
Total liabilities and shareholders' equity $ 2,241,432 $ 2,271,080
=================== ==================
See Notes to Consolidated Financial Statements.
42
MASSEY ENERGY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars)
Year Ended Two Months Ended
-------------------------------------------- ------------------------------
December 31, October 31, October 31, December 31, December 31,
2002 2001 2000 2001 2000
------------- --------------- -------------- -------------- ---------------
(Unaudited)
Cash Flows From Operating Activities
Net (loss) income $ (32,574) $ (5,420) $ 78,531 $ (14,801) $ (6,719)
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation, depletion and amortization 207,730 181,269 171,336 31,192 28,831
Deferred taxes 3,511 (4,260) 28,053 (8,748) (4,296)
Loss (Gain) on disposal of assets 803 517 (28,169) 111 4,296
Gain on repurchase of senior notes (3,290) -- -- -- --
Changes in operating assets and liabilities:
Decrease (Increase) in accounts receivable 2,068 4,603 (42,801) 11,079 9,864
(Increase) Decrease in inventories (37,876) (40,350) (12,349) (14,310) 1,965
Increase in other current assets (17,657) (25,461) (13,983) (3,579) (22,733)
Decrease (Increase) in pension and other assets 4,961 25,237 (30,013) 11,938 (6,698)
(Decrease) Increase in accounts payable and bank
overdrafts (61,877) 32,446 (6,729) 907 (34,990)
(Decrease) Increase in accrued income taxes (4,557) (7,002) 2,197 -- (2,427)
Increase (Decrease) in other accrued liabilities 76,950 (2,004) (5,204) (906) (20,442)
(Decrease)Increase in other non-current
liabilities (15,717) 13,217 12,818 6,553 9,398
------------- --------------- -------------- -------------- --------------
Cash provided (utilized) by operating activities 122,475 172,792 153,687 19,436 (46,682)
------------- --------------- -------------- -------------- --------------
Cash Flows From Investing Activities
Capital expenditures (135,099) (247,517) (204,835) (37,698) (23,386)
Proceeds from sale of assets 13,127 34,870 32,072 416 --
------------- --------------- -------------- -------------- --------------
Cash utilized by investing activities (121,972) (212,647) (172,763) (37,282) (23,386)
------------- --------------- -------------- -------------- --------------
Cash Flows From Financing Activities
Increase (Decrease) in short-term debt, net 944 (29,998) -- 14,870 (3,568)
Proceeds from sale and leaseback of equipment 16,955 -- -- -- --
Repurchase of senior notes (10,710) -- -- -- --
Decrease in amount due from Fluor Corporation -- 67,554 1,352 -- 67,554
Equity contributions from Fluor Corporation -- 2,476 17,069 -- 2,476
Cash dividends paid (11,919) (11,811) -- -- --
Stock options exercised 1,408 9,369 -- 2,856 --
Other, net -- 1,000 (467) -- 1,058
------------- --------------- -------------- -------------- --------------
Cash (utilized) provided by financing activities (3,322) 38,590 17,954 17,726 67,520
------------- --------------- -------------- -------------- --------------
Decrease in cash and cash equivalents (2,819) (1,265) (1,122) (120) (2,548)
Cash and cash equivalents at beginning of period 5,544 6,929 8,051 5,664 6,929
------------- --------------- -------------- -------------- --------------
Cash and cash equivalents at end of period $ 2,725 $ 5,664 $ 6,929 $ 5,544 $ 4,381
============= =============== ============== ============== ==============
Supplemental Cash Flow Information
Cash paid during the period for income taxes $ 1,156 $ 1,656 $ 12,834 $ 46 $ 107
============= =============== ============== ============== ==============
See Notes to Consolidated Financial Statements.
43
MASSEY ENERGY COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In Thousands of Dollars except share amounts)
Common Stock Unamortized Net
------------------------- Executive Investment Due From
Additional Stock Plan by Fluor Fluor
Shares Amount Capital Expense Corporation Corporation
---------------------------------------------------------------------------------
Balance at October 31, 1999 73,469 $ 45,918 $ -- $ -- $ 1,510,789 $ (280,416)
- ---------------------------------------------------------------------------------------------------------------------------
Net income 78,531
Other comprehensive loss, net of
deferred tax benefit of $30:
Unrealized loss on investment
Reclassification of unrealized
gain to net income
Comprehensive income
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, net of
deferred tax of $488:
Reclassification of unrealized
gain 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 74,544 $ 46,590 $ 15,541 $ (6,706) $ -- $ --
---------------------------------------------------------------------------------
Net loss
Exercise of stock options, net 253 158 2,698
Stock option tax benefit 640
Amortization of executive stock plan 239
expense
Issuance of restricted stock, net (23) (14) (320) 334
---------------------------------------------------------------------------------
Balance at December 31, 2001 74,774 $ 46,734 $ 18,559 $ (6,133) $ -- $ --
---------------------------------------------------------------------------------
Net loss
Dividends declared ($0.16 per share)
Exercise of stock options, net 126 78 1,330
Stock option tax benefit 208
Amortization of executive stock plan 1,550
expense
Issuance of restricted stock, net 418 262 1,562 (1,824)
---------------------------------------------------------------------------------
Balance at December 31, 2002 75,318 $ 47,074 $ 21,659 $ (6,407) $ -- $ --
=================================================================================
Accumulated
Other Total
Retained Comprehensive Shareholders'
Earnings Loss Equity
------------------------------------------
Balance at October 31, 1999 $ -- $ (716) $ 1,275,575
- ------------------------------------------------------------------------------------
Net income 78,531
Other comprehensive loss, net of
deferred tax benefit of $30:
Unrealized loss on investment 1,075 1,075
Reclassification of unrealized
gain to net income (1,122) (1,122)
-------------
Comprehensive income 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, net of
deferred tax of $488:
Reclassification of unrealized 763 763
gain 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
------------------------------------------
Net loss (14,801) (14,801)
Exercise of stock options, net 2,856
Stock option tax benefit 640
Amortization of executive stock plan 239
expense
Issuance of restricted stock, net --
------------------------------------------
Balance at December 31, 2001 $ 790,379 $ -- $ 849,539
------------------------------------------
Net loss (32,574) (32,574)
Dividends declared ($0.16 per share) (11,919) (11,919)
Exercise of stock options, net 1,408
Stock option tax benefit 208
Amortization of executive stock plan 1,550
expense
Issuance of restricted stock, net --
------------------------------------------
Balance at December 31, 2002 $ 745,886 $ -- $ 808,212
==========================================
See Notes to Consolidated Financial Statements.
44
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 12), 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 during all periods reported. All significant
intercompany transactions and accounts have been eliminated.
Change in Fiscal Year-end
The Company changed to a calendar-year basis of reporting financial results
effective January 1, 2002. For comparative purposes, the reported audited
consolidated results of operations and cash flows for 2001 and 2000 annual
periods are for the twelve months ended October 31. As a requirement of the
change in fiscal year, the Company is reporting consolidated results of
operations and cash flows for a special transition period, the two months ended
December 31, 2001 (audited) compared with the two-months ended December 31, 2000
(unaudited). The comparative audited consolidated balance sheets are as of
December 31, 2002 and October 31, 2001.
2. 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.
Inventories
Produced coal and supplies inventories generally are stated at the lower of
average cost or net realizable value. Coal inventory costs include labor,
supplies, equipment costs, operating overhead, and other related costs.
Purchased coal inventories are stated at the lower of cost, computed on the
first-in, first-out method, or net realizable value.
Inventories consisted of the following:
(in thousands) At December 31, 2002 At October 31, 2001
-------------- -------------------- -------------------
Saleable coal $ 69,823 $ 46,872
Raw coal 47,898 45,254
Work in process 52,817 25,789
----------- -----------
Subtotal coal inventory $ 170,538 $ 117,915
Supplies inventories 23,131 23,568
----------- -----------
Total inventory $ 193,669 $ 141,483
=========== ===========
Saleable coal includes coal ready for sale. This category includes
inventories located at customer facilities under consignment arrangements. Raw
coal represents coal that may be further processed prior to shipment to customer
or may be sold in current condition. Work in process consists of the costs
incurred to remove overburden above an unmined coal seam as part of the surface
mining process.
Income Taxes
Deferred income taxes result from temporary differences between the tax
bases of assets and liabilities and their financial reporting amounts.
45
Other Current Assets
Other current assets are comprised of the following:
(In thousands) December 31, October 31,
2002 2001
---- ----
Longwall panel costs $ 39,155 $ 51,971
Deposits 42,319 4,079
Other 35,852 39,984
----------- ----------
Total other current assets $ 117,326 $ 96,034
=========== ==========
Longwall panel costs consist of deferred 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.
Deposits consist of funds placed in restricted accounts with financial
institutions to collateralize letters of credit that support workers'
compensation requirements and other insurance obligations, as well as collateral
required from customers as credit enhancement, with a corresponding liability
recorded within Other current liabilities.
Property, Plant and Equipment
Property, plant and equipment is carried at cost and comprises:
December 31, October 31,
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------
Land, buildings and equipment $ 1,692,587 $ 1,652,017
Mining properties and mineral rights 602,303 596,280
Mine development 522,255 466,777
--------------- ---------------
Total property, plant and equipment 2,817,145 2,715,074
Less accumulated depreciation, depletion and amortization (1,282,657) (1,101,941)
--------------- ---------------
Net property, plant and equipment $ 1,534,488 $ 1,613,133
=============== ===============
Expenditures that extend the useful lives of existing buildings and
equipment are capitalized. Maintenance and repairs 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. As of December 31, 2002, approximately $53.0 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.
During the third quarter of 2002, the Company purchased the Holston mining
assets from Pittston Coal Company. These assets, valued at approximately
$11.0 million, included the Holston room and pillar mine and the preparation
plant, among other assets. Total consideration paid by the Company was $6.2
million in cash, plus assumed liabilities of approximately $4.8 million.
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 estimate useful life not to exceed 7 years.
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. See Note 4 for a
description of impairment charges that were recorded in the consolidated
statement of earnings.
46
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 December 31, 2002 and October 31, 2001,
advance mining royalties included in other noncurrent assets totaled $29.5 and
$29.8 million, respectively.
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 the Company's total
reclamation and mine-closing liabilities are based upon permit requirements and
the Company's engineering expertise related to these requirements. For each
permit, the Company 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. The Company's reclamation costs 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. As indicated in Accounting Pronouncements within this Note, SFAS No.
143, effective for the Company on January 1, 2003, will change the Company's
method of accounting for reclamation liabilities.
Shareholders' Equity
The Statement of Shareholders' Equity for periods prior to the Spin-Off
(see Note 12) 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.
Revenue Recognition
Coal sales are recognized when title passes to 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.
Produced coal revenue represents revenue recognized from the sale of coal
produced by the Company.
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 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. Tons of purchased coal shipped
were 3.3 million tons for the year ended December 31, 2002 and 1.3 million tons
for the years ended October 31, 2001 and 2000.
Other revenue generally consists of royalties, rentals, contract buyout
payments, coal handling services, miscellaneous income and gains on the sale of
non-strategic assets. For the years ended October 31, 2001 and 2000, the Company
recorded gains on the sale of non-strategic reserves of $1.1 million, and $26.5
million, respectively. The gains and losses on reserve sales for the year ended
December 31, 2002 were not material. Contract buyout payments were $23.5
million, including $5.1 million from one large customer, for the year ended
December 31, 2002, and were not material for the years ended October 31, 2001
and 2000.
Earnings per Share
Shares used to calculate basic earnings per share for the period ended
October 31, 2000 are the number of shares outstanding immediately following the
Spin-Off (see Note 12). 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
47
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 12). 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 periods
subsequent to the Spin Off is based on the weighted number of average
outstanding shares of Massey Energy during the period. Shares used to calculate
diluted earnings per share for the period ended October 31, 2000 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 periods subsequent to the Spin Off as such inclusion would
result in antidilution.
The computations for basic and diluted (loss) earnings per share are based
on the following per share information:
Year Ended Two months Ended
---------------------------------------- ---------------------------
December 31, October 31, October 31, December 31, December 31,
(In thousands) 2002 2001 2000 2001 2000
- ---------------------------------------------- ------------- ------------ ------------ ------------- -------------
(Unaudited)
Weighted number of average shares of
common stock outstanding:
Basic 74,442 73,858 73,469 74,131 74,098
Effect of stock options/restricted stock - - 3 - -
------------- ------------ ------------ ------------- -------------
Diluted 74,442 73,858 73,472 74,131 74,098
============= ============ ============ ============= =============
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. The Company has implemented the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" (SFAS No. 123). The Company has recognized no stock-based
compensation expense related to stock options in the years ended October 31,
2000, October 31, 2001, December 31, 2002 and the two months ended December 31,
2001, as all options granted had an exercise price equal to market value of the
underlying common stock on the date of the grant. See Note 13 for additional
information. If the Company had followed the fair value method under SFAS 123 to
account for stock based compensation for stock options, the amount of stock
based compensation cost for stock options, net of related tax, which would have
been recognized for each period and pro-forma net income for each period would
have been as follows:
Two Months
Year ended Ended
---------------------------------------------------
December 31, October 31, October 31,December 31,
2002 2001 2000 2001
---------------------------------------------------
(in thousands, except per share amounts)
Net (loss) income, as reported ($ 32,574) ($ 5,420) $ 78,531 ($ 14,801)
Deduct: Total stock-based employee compensation expense ($ 2,135) ($ 1,375) ($ 1,600) ($ 361)
for stock options determined under Black-Scholes
option pricing model
---------------------------------------------------
Pro forma net (loss) income ($ 34,709) ($ 6,795) $ 76,931 ($ 15,162)
===================================================
Earnings (loss) per share:
Basic - as reported ($0.44) ($0.07) $ 1.07 ($0.20)
---------------------------------------------------
Basic - pro forma ($0.47) ($0.09) $ 1.05 ($0.20)
---------------------------------------------------
Diluted - as reported ($0.44) ($0.07) $ 1.07 ($0.20)
---------------------------------------------------
Diluted - pro forma ($0.47) ($0.09) $ 1.05 ($0.20)
---------------------------------------------------
Derivatives
Effective November 1, 2000, the Company adopted Statement of Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 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.
Accounting Pronouncements
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The provisions of this statement provide for a
single accounting model for measuring impairment of long-lived assets. The
adoption of SFAS No. 144 did not have a material effect on the Company's
financial condition or results of operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections," which is effective for fiscal
years beginning after May 2002. The standard requires that gains or losses on
debt extinguishment, previously reported as extraordinary items, be presented as
a component of results from continuing operations unless the extinguishment
meets the criteria for classification as an extraordinary item in Accounting
Principles Board Opinion No. 30. During the fourth quarter of 2002, the Company
purchased in open market transactions, an aggregate of $14.0 million of its 6.95
percent Senior Notes at an aggregate purchase price of $10.7 million. The
Company has chosen early adoption of SFAS No. 145, and accordingly, recorded a
gain of $3.3 million on the transactions in Senior notes repurchase income, a
component of Total revenue.
On August 15, 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." 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 statement is effective for the Company beginning
January 1, 2003, and transition is by cumulative catch-up adjustment. The
adoption changes the Company's current accounting for reclamation. The Company
is continuing to calculate its transition adjustment.
48
In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others ("FIN 45"). This Interpretation describes
the disclosure requirements of a guarantor's issuance of certain guarantees, and
clarifies that a guarantor is required to recognize a liability, at the date of
issuance, for the fair value of the obligation assumed in issuing the guarantee.
The disclosure requirements of FIN 45 are effective for the Company for the year
ended December 31, 2002, and the initial recognition and measurement provisions
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. This Interpretation is not expected to have a material effect
on the Company's financial position, results of operations, or liquidity.
3. 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 60%, 54%, and 50% of produced coal revenue for the years ended
December 31, 2002, and October 31, 2001, and 2000, respectively. Metallurgical
coal sales accounted for approximately 30%, 34%, and 40% of produced coal
revenue for the years ended December 31, 2002, and October 31, 2001, and 2000,
respectively. Industrial coal sales for the years ended December 31, 2002, and
October 31, 2001, and 2000 were 10%, 12%, and 10% 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 year ended December 31, 2002, approximately 11% and 12% of produced
coal revenue was attributable to two utility customers, Duke Energy Corporation
and its affiliate, Duke Energy Merchants, LLC, and affiliates of DTE Energy
Company, respectively. For the years ended October 31, 2001 and 2000,
approximately 11%, and 14%, respectively, of produced coal revenue was
attributable to Duke Energy Corporation and its affiliate, Duke Energy
Merchants, LLC. At December 31, 2002, approximately 20%, 59% and 21% of
consolidated trade receivables represent amounts due from metallurgical
customers, utility customers and industrial customers, respectively, compared
with 25%, 63% and 12%, respectively, as of October 31, 2001. Credit is extended
based on an evaluation of the customer's financial condition. To mitigate
credit-related risks in all customer classifications, the Company maintains a
credit policy that requires scheduled reviews of customer creditworthiness and
continuous monitoring of customer news events which might have an impact on
their financial condition. Negative credit performance or events may trigger the
application of tighter terms of sale, requirements for collateral or,
ultimately, a suspension of credit privileges.
The Company's trade accounts receivable are subject to potential default by
customers. Specifically, the Company has exposure to the U.S. steel industry and
energy trading and brokering companies which have faced economic difficulty in
recent years. Certain of the Company's customers have filed for bankruptcy
resulting in bad debt charges to the Company. The Company establishes its
doubtful account reserve to consider specifically customers in financial
difficulty and other potential receivable losses. In establishing its reserve,
the Company considers the financial condition of its individual customers, and
probability of recovery in the event of default. The Company charges off
uncollectible trade receivables once legal pontential for recovery is exhausted.
4. Impairment of Long-Lived Assets
The following impairment charges were recorded in the consolidated
statement of earnings:
During the third quarter of 2002, the Company recorded a charge in the
amount of $13.2 million (pre-tax) related to the write off of capitalized
development costs at certain idled mines, which included the Pegs Branch mine,
the Spring Branch mine, and the Ruby Energy mine. This charge is included in
depreciation, depletion and amortization for the year ended December 31, 2002.
During the third quarter of 2002, the Pegs Branch mine of the Sidney
resource group was closed. Based on operating conditions experienced in the Pegs
Branch mine a decision was made to forego mining the final section of reserves.
The mining equipment was moved to another mine location with more favorable coal
reserve conditions. Unamortized development costs of approximately $1.7 million
were written off during the third quarter of 2002 as a result of the Pegs Branch
mine closure.
The Spring Branch mine of the Stirrat resource group temporarily ceased
mining in January of 2001 due in part to a lack of experienced mine personnel.
As part of the budget process for 2003, the mine, its coal reserves and its
mining conditions were reassessed for future operating potential. Management
made the decision to permanently abandon this mine during the third quarter of
2002. Unamortized development costs of approximately $2.3 million were written
off in the third quarter as a result of the Spring Branch mine closure.
The Ruby Energy mine of the Delbarton resource group temporarily ceased
operations in February of 2002 in reaction to market demand for steam coal by
utilities. During the third quarter of 2002, as part of the 2003 budget process,
Company management decided that a section of the mine that crossed under a creek
would not be utilized in future mining plans. Unamortized development costs
related to this section of the mine of approximately $9.2 million were written
off in the third quarter related to the Ruby Energy mine closure. Other areas of
the mine are expected to be mined in accordance with the mine plans as approved
by management.
During the third quarter of 2001, management decided to move a longwall at
the Jerry Fork mine of the Nicholas Energy resource group 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. This charge is reflected in cost of produced coal revenue for the
year ended October 31, 2001.
During the fourth quarter of 2000, due to significant rock falls and
continual poor and unsafe mining conditions at the Upper Cedar Grove mine of the
Independence resource group, the Company abandoned certain longwall mining
49
equipment and wrote off related longwall panel development costs. This write-off
of approximately $9 million is included in cost of produced coal revenue for the
year ended October 31, 2000.
5. 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 is
unable to utilize the tax credits generated by the LLC. In order to monitize the
value of the Company's investment, the Company 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 sales transaction. The Series C owner is responsible for
providing recourse working capital loans to the LLC 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, and May 9, 2002, the Company, in a two-part transaction,
sold 99% of its Series A and Series B interests, respectively, in the LLC,
contingent upon favorable Internal Revenue Service rulings, which were received
in September 2001 and in June 2002, respectively. The Company received cash of
$7.2 million, a recourse promissory note for $34.6 million that will be paid in
quarterly installments of $1.9 million including interest, and a contingent
promissory note that is paid on a cents per Section 29 credit dollar earned
based on synfuel tonnage shipped. Deferred gains of $23.8 million and $11.9
million as of December 31, 2002 and October 31, 2001, respectively, are 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.
6. Income Taxes
Income tax (benefit) expense included in the consolidated statement of
earnings is as follows:
Year Ended Two Months Ended
December 31, October 31, October 31, December 31, December 31,
(In thousands) 2002 2001 2000 2001 2000
(Unaudited)
Current:
Federal $ (24,694) $ (6,389) $ 13,735 $ - $ -
State and local (3,763) 148 1,447 25 -
------------ ------------ ------------ ------------ -------------
Total current (28,457) (6,241) 15,182 25 -
Deferred:
Federal 1,050 (3,639) 24,562 (8,707) (3,855)
State and local 2,461 (621) 3,491 (41) (441)
------------ ------------ ------------ ------------ -------------
Total deferred 3,511 (4,260) 28,053 (8,748) (4,296)
------------ ------------ ------------ ------------ -------------
Total income tax (benefit)
expense $ (24,946) $ (10,501) $ 43,235 $ (8,723) $ (4,296)
============ ============ ============ ============ =============
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.
50
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 Two Months Ended
December 31,
December 31, October 31, October 31, December 31, 2000
(In thousands) 2002 2001 2000 2001 (Unaudited)
- -------------- ------------ ------------ ------------ ------------ ------------
U.S. statutory federal tax expense $ (20,132) $ (5,572) $ 42,618 $ (8,233) $ (3,855)
Increase (Decrease) resulting from:
State taxes (4,558) (170) 3,781 (25) (441)
Items without tax effect 1,526 700 5,235 86 -
Depletion (7,350) (4,496) (7,657) (551) -
FSC exempt income (1,050) (963) (952) - -
Other, net 6,618 -- 210 - -
------------ ------------ ------------ ------------ ------------
Total income tax (benefit)
expense $ (24,946) $ (10,501) $ 43,235 $ (8,723) $ (4,296)
============ ============ ============ ============ ============
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:
December 31, October 31,
(In thousands) 2002 2001
- -------------- -------------- ---------------
Deferred tax assets:
Postretirement benefit obligations $ 28,608 $ 28,428
Worker's compensation 14,648 15,975
Reclamation and mine closure 41,167 32,416
Alternative minimum tax credit carryforwards 80,948 59,549
State NOL 14,204 6,959
Other 42,791 28,287
222,366 171,614
Valuation allowance for deferred tax assets (85,889) (66,508)
-------------- ---------------
Deferred tax assets, net 136,477 105,106
-------------- ---------------
Deferred tax liabilities:
Plant, equipment and mine development (231,782) (187,136)
Mining property and mineral rights (107,648) (110,748)
Other (27,834) (44,094)
-------------- ---------------
Total deferred tax liabilities (367,264) (341,978)
-------------- ---------------
Net deferred tax liabilities $ (230,787) $ (236,872)
============== ===============
The Company's deferred tax assets include alternative minimum tax ("AMT")
credits of $80.9 and $59.5 million each at December 31, 2002 and October 31,
2001. 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. State
net operating loss carryforwards begin to expire in 2016.
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 the
years ending December 31, 2002, and October 31, 2001, by $4.1 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 1998 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 $1,045,000, $172,000, and $821,000 as
a result of audits conducted during the years ended October 31, 2000 and 2001,
and December 31, 2002, respectively.
51
Massey's federal income tax returns have been examined by the Internal
Revenue Service, or Statutes of Limitations have expired through 1998.
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.
7. Debt
The Company's short-term debt at December 31, 2002, consists of $264.0
million of borrowings outstanding under its credit facilities. The weighted
average effective interest rate of the outstanding borrowings was 3.92 percent
at December 31, 2002 and 3.03 percent at October 31, 2001. In early May 2002,
Moody's and S&P downgraded the Company's credit ratings. These ratings actions
effectively prevented the Company from accessing the commercial paper market due
to the restrictive investment policy credit guidelines of potential commercial
paper investors and caused the Company to draw on the credit facilities for
short-term financing needs. The Company had no commercial paper obligations
outstanding at December 31, 2002, and $240.4 million at October 31, 2001. At
October 31, 2001, the Company also had outstanding a note payable in the amount
of $7.8 million, which was due and paid on November 1, 2001. At December 31,
2002, the Company's available liquidity was $134.5 million, including cash and
cash equivalents of $2.7 million and $131.8 million remaining on the Company's
revolving credit facilities.
On November 26, 2002, Massey and its lenders concluded the extension and
amendment of the $150 million 364-day and $250 million multi-year revolving
credit facilities, which have been guaranteed by A. T. Massey, that serve as the
primary source of the Company's short-term liquidity. The credit facilities now
provide the lenders with selected assets as collateral for borrowings under the
facilities. The selected assets that are collateral for the credit facilities
include all capital stock of the Company's subsidiaries and substantially all of
the Company's assets, now owned or at any time hereafter acquired by the
Company, excluding among other things, all coal, oil and gas reserves and mining
permits, certain properties (e.g., the Eastman Chemical Company Coal Handling
System and Westvaco Coal Handling Facility, and the value of properties that
might exceed the lien threshold established in the indenture related to the
Senior Notes (discussed below)) and certain other assets associated with the
Company's accounts receivable securitization program discussed below. Both
facilities have been renewed through November 25, 2003. The Company intends to
replace these credit facilities prior to their expiration on November 25, 2003.
Borrowings under these facilities bear interest based on (i) the London
Interbank Offer Rate (LIBOR) or (ii) the Base Rate (as defined in the facility
agreements) plus a margin, which is based on the Company's senior secured debt
credit rating as determined by Moody's and Standard & Poor's. At December 31,
2002, and currently, Massey's senior secured debt ratings are Ba1 and BB+,
respectively.
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 December 31, 2002 and during
other periods reflected except for the covenant related to the maximum leverage
ratio, with which we were not in compliance at December 31, 2001. However, the
participant banks granted a waiver of this financial covenant for the period
ended December 31, 2001. In the event we violate any of the debt covenants and
do not affect a timely cure or receive a waiver from the lenders in our credit
facilities, the debt agreements provide that the Administrative Agent shall, if
requested by at least four lenders holding at least 50% of the aggregate amount
of the loans, declare the loans immediately due and payable.
In determining EBITDA as defined in the credit facility agreements for use
in computing the leverage ratio, the Company has excluded certain items,
including the $25.6 million charge relative to the Harman litigation described
in Note 15. The Company believes that the exclusion of such items is appropriate
and has notified the lenders' Administrative Agent of this exclusion. If the
accrual for the Harman litigation were to be included in the EBITDA calculation
and no further adjustments were made, the Company would still be in compliance
with the covenant at December 31, 2002.
The Company had $286.0 million of long-term debt as of December 31, 2002,
which consisted entirely of 6.95 percent Senior Notes (the "Notes") due March 1,
2007. Initially, $300 million of the Notes were issued in March 1997 at a
discount, for aggregate proceeds of $296.7 million. During the fourth quarter of
2002, the Company made several open-market purchases, retiring a total principal
amount of $14.0 million of the Notes at a cost of $10.7 million plus accrued
interest. A gain of $3.3 million was recognized in the fourth quarter of 2002
and is shown in the Consolidated Financial Statements of Income in Senior notes
repurchase income. 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. On
November 27, 2002, Moody's and S&P reduced the credit ratings on the Senior
Notes to Ba3 and B+, respectively, citing the structural subordination caused by
the secured status of the amended bank credit facilities.
Additionally, the Company has available a $500 million debt shelf
registration filed with the Securities and Exchange Commission (the "SEC") in
March 1999, all of which remains unused. Prior to the Spin-Off, Fluor
Corporation filed this debt shelf registration. An updated filing with the SEC
would be required to issue debt under this shelf registration.
52
Total interest paid for the year ended December 31, 2002 and October 31,
2001, was $35.4 million and $34.8 million, respectively, and was not material
for the year ended October 31, 2000.
Off-Balance sheet arrangements
In the normal course of business, the Company is a party to certain
off-balance sheet arrangements including guarantees, indemnifications, and
financial instruments with off-balance sheet risk, such as bank letters of
credit and performance or surety bonds. Liabilities related to these
arrangements are not reflected in our consolidated balance sheets, and we do not
expect any material adverse effects on our financial condition, results of
operations or cash flows to result from these off-balance sheet arrangements.
The Company uses surety bonds to secure reclamation, workers' compensation,
wage payments, and other miscellaneous obligations. As of December 31, 2002, the
Company had $261 million of outstanding surety bonds with third parties. These
bonds were in place to secure obligations as follows: post-mining reclamation
bonds of $217 million, workers' compensation bonds of $10 million, wage payment
and collection bonds of $9 million, and other miscellaneous obligation bonds of
$25 million. Recently, surety bond costs have increased, while the market terms
of surety bonds have generally become less favorable. To the extent that surety
bonds become unavailable, the Company would seek to secure obligations with
letters of credit, cash deposits, or other suitable forms of collateral.
From time to time the Company uses bank letters of credit to secure its
obligations for worker's compensation programs, various insurance contracts and
other obligations. Issuing banks currently require that such letters of credit
be secured by funds deposited into restricted accounts pledged to the banks
under reimbursement agreements. At December 31, 2002, the Company had $32.5
million of letters of credit outstanding, collateralized by $31.5 million of
cash deposited in restricted, interest bearing accounts, and no claims were
outstanding against those letters of credit.
8. Fair Value of Financial Instruments
Certain Company subsidiaries prior to 2002 provided 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 December
31, 2002 and October 31, 2001 amounted to $4.8 million and $10.5 million,
respectively, of which $1.9 million and $2.4 million, respectively, are
unsecured. These loans are estimated to be at fair value, after recording an
allowance for loan losses of $1.4 million at December 31, 2002 and $2.1 million
at October 31, 2001, 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 12), 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 and 2000 related to these loans amounted to
$1.5 million and $16.6 million, respectively. These loans were classified as a
reduction to shareholders' equity prior to the Spin-Off and were settled as part
of the Spin-Off transaction.
In addition, the Company had outstanding $264.0 million and $248.2 million
of short-term debt at December 31, 2002 and October 31, 2001, respectively (see
Note 7). 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 7). The fair value of the Senior Notes at December
31, 2002, based on currently available market information, was $270.9 million.
The Senior Notes are not traded frequently and there were no trades reported as
a benchmark.
9. Pension Plans
Defined Benefit Pension
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 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 plan 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 $174 million at December 31, 2002.
53
Net periodic pension expense (income) for the defined benefit pension plan
includes the following components:
Year Ended Two Months
Ended
--------------------------------------------- ---------------
December 31, October 31, October 31, December 31,
(In thousands) 2002 2001 2000 2001
----------------------------------------- --------------- -------------- -------------- ---------------
Service cost $ 10,649 $ 2,657 $ 2,509 $ 1,769
Interest cost 10,256 9,498 9,114 1,693
Expected return on plan assets (18,069) (22,245) (20,732) (2,886)
Amortization of unrecognized net
liability / (asset) -- (1,800) (2,116) 74
Amortization of prior service cost 133 57 56 10
--------------- -------------- -------------- ---------------
Net periodic pension expense / (income) $ 2,969 $ (11,833) $ (11,169) $ 660
=============== ============== ============== ===============
The weighted average assumptions used in determining pension benefit
obligations are as follows:
December 31, October 31, December 31,
2002 2001 2001
-------------------------------------------------------- -------------- --------------- --------------
Discount rates 6.75% 7.25% 7.25%
Rates of increase in compensation levels 4.00% 4.00% 4.00%
Expected long-term rate of return on plan assets used
in determining expense in each of the periods 9.00% 9.50% 9.00%
The following table sets forth the change in benefit obligation, plan
assets and funded status of the Company's defined benefit pension plan:
Two Months
Year Ended Year Ended Ended
December 31, October 31, December 31,
(In thousands) 2002 2001 2001
----------------------------------------------------- ----------------- ---------------- ----------------
Change in benefit obligation
Benefit obligation at the beginning of the
period $ 147,724 $ 126,687 $ 140,194
Service cost 10,649 2,657 1,769
Interest cost 10,256 9,498 1,693
Actuarial loss 6,103 7,626 5,120
Plan amendment 859 -- --
Benefits paid (6,880) (6,274) (1,052)
----------------- ---------------- ----------------
Benefit obligation at end of period $ 168,711 $ 140,194 $ 147,724
================= ================ ================
Change in plan assets
Fair value at the beginning of the period $ 204,473 $ 237,551 $ 196,131
Actual (loss) return on assets (23,626) (35,156) 9,390
Company contributions 29 10 4
Benefits paid (6,880) (6,274) (1,052)
----------------- ---------------- ----------------
Fair value at end of period $ 173,996 $ 196,131 $ 204,473
================= ================ ================
Funded status $ 5,285 $ 55,937 $ 56,749
Unrecognized net actuarial loss 67,153 20,743 19,423
Unrecognized prior service cost 1,187 461 451
----------------- ---------------- ----------------
Pension assets 73,625 77,141 76,623
Amount included in current liabilities 3,731 3,259 3,124
----------------- ---------------- ----------------
Noncurrent asset $ 77,356 $ 80,400 $ 79,747
================= ================ ================
54
Multi-Employer Pension
Under labor contracts with the United Mine Workers of America, 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 the years ended December 31, 2002, October
31, 2001 and October 31, 2000. Payments into the two multi-employer plan trusts
were less than $0.1 million during the two months ended December 31, 2001.
Defined Contribution and Salary Deferral Pension
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.
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 cash balance formula discussed in the first paragraph of this
Note.
For certain eligible employees, the Company sponsors a contributory defined
contribution pension plan with Company contributions based on hours worked.
Effective October 1, 2001, the maximum 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.
For the years ended December 31, 2002 and October 31, 2001 and 2000,
Company contributions to these three plans aggregated approximately $0.2
million, $7.5 million, and $5.6 million, respectively. Contributions to these
plans during the two months ended December 31, 2001 were less than $0.1 million.
The Company also sponsors a salary deferral and profit sharing plan
covering substantially all administrative and non-union employees. Effective
October 1, 2001, the maximum 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 $4.6 million,
$2.5 million, and $2.2 million for the years ended December 31, 2002, October
31, 2001 and October 31, 2000, respectively, and approximately $0.6 million for
the two-month period ended December 31, 2001.
10. Other Noncurrent Liabilities
Other noncurrent liabilities comprise the following:
December 31, October 31,
(In thousands) 2002 2001
- -------------- ---------- ----------
Reclamation $ 104,895 $ 107,448
Other post-employment benefits (Note 11) 79,578 72,061
Workers' compensation and black lung 78,322 75,810
Other 66,486 62,477
---------- ----------
Total other noncurrent liabilities $ 329,281 $ 317,796
========== ==========
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
December 31, 2002, October 31, 2001 and 2000, and the two-months ended December
31, 2001, the Company accrued approximately $9.8 million, $6.4 million, $6.5
million and $1.6 million, respectively, towards final mine closure reclamation,
excluding re-costing adjustments identified below. The Company regularly reviews
its estimated 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 $1.7 million, $6.6 million, $7.2 million and
$0.2 million for the years ended December 31, 2002, October 31, 2001 and 2000,
and the two-months ended December 31, 2001, 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 December 31,
2002 are estimated to be approximately $163 million. As indicated in Note 2,
SFAS No. 143, effective for the Company on January 1, 2003, will change the
Company's method of accounting for reclamation liabilities.
55
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.
Expenses for black lung benefits and workers' compensation related benefits
include the following components:
Year Ended Two Months
Ended
--------------------------------------------- ---------------
December 31, October 31, October 31, December 31,
(In thousands) 2002 2001 2000 2001
- ----------------------------------------- --------------- -------------- -------------- ---------------
Self-insured black lung benefits
Service cost $ 3,461 $ 1,792 $ 1,558 $ 598
Interest cost 3,478 3,054 3,418 626
Amortization of actuarial gain (2,068) (4,080) (3,174) (192)
--------------- -------------- -------------- ---------------
$ 4,871 $ 766 $ 1,802 $ 1,032
Other workers' compensation benefits 31,727 27,106 16,383 4,308
--------------- -------------- -------------- ---------------
$ 36,598 $ 27,872 $ 18,185 $ 5,340
=============== ============== ============== ===============
The actuarial assumptions used in the determination of black lung benefits
included a discount rate of 6.75% as of December 31, 2002, (7.25% as of October
31, 2001 and December 31, 2001, and 7.75% as of October 31, 2000) 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 $30.0 million, $25.0 million, and $20.8 million in 2002, 2001,
and 2000, respectively, and $2.6 million in the two months ended December 31,
2001.
Workers' compensation and black lung consisted of the following:
At December 31, At October 31,
(In thousands) 2002 2001
- ---------------------------------------------------------------------------------- -----------------
Accrued self-insured black lung obligation $ 62,886 $ 59,578
Workers' compensation (traumatic injury) 37,432 31,535
------ ------
Total accrued workers' compensation and black lung $ 100,318 $ 91,113
Less amount included in other current liabilities 21,996 15,303
------ ------
Workers' compensation & black lung in other noncurrent
liabilities $ 78,322 $ 75,810
====== ======
56
The reconciliation of changes in the benefit obligation of the black lung
obligation is as follows:
At December At October 31, At December
(In thousands) 31, 2002 2001 31, 2001
---------------------------------------------------------- --------------- ------------------ -----------------
Beginning of year accumulated black lung obligation $ 49,238 $ 40,414 $ 48,502
Service cost 3,461 1,792 598
Interest cost 3,478 3,054 626
Actuarial loss (gain) 2,749 5,768 -
Benefit payments (2,107) (2,526) (488)
------- ------- -----
End of year accumulated black lung obligation $ 56,819 $ 48,502 $ 49,238
Unamortized net gain 6,067 11,076 10,884
------ ------ ------
Accrued self-insured black lung obligation $ 62,886 $ 59,578 $ 60,122
====== ====== ======
11. Post-Employment Benefits
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 postretirement benefit obligation at December 31, 2002
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 rates of 11.0% ranging down to 5.0% in 2009 (8.0%
ranging down to 5.0% in 2007 at October 31, 2001) 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 $ 1,887 $ (1,534)
Effect on accumulated postretirement benefit obligation $ 18,976 $ (15,570)
Net periodic postretirement benefit cost includes the following components:
Year Ended Two Months
Ended
--------------------------------------------- ---------------
December 31, October 31, October 31, December 31,
(In thousands) 2002 2001 2000 2001
----------------------------------------- --------------- -------------- -------------- ---------------
Service cost $ 4,636 $ 3,426 $ 3,543 $ 749
Interest cost 6,062 5,333 4,611 1,064
Recognized loss -- -- -- 45
Amortization of prior service cost 140 140 140 23
--------------- -------------- -------------- ---------------
Net periodic postretirement benefit cost $ 10,838 $ 8,899 $ 8,294 $ 1,881
=============== ============== ============== ===============
57
The following table sets forth the change in benefit obligation of the
Company's postretirement benefit plans:
Two Months
Year Ended Year Ended Ended
December 31, October 31, December 31,
(In thousands) 2002 2001 2001
----------------------------------------------------- ----------------- ---------------- ----------------
Change in benefit obligation
Benefit obligation at the beginning of the
period $ 90,780 $ 66,355 $ 89,566
Service cost 4,616 3,426 749
Interest cost 6,062 5,333 1,064
Actuarial loss 23,483 16,857 --
Benefits paid (3,830) (2,405) (599)
----------------- ---------------- ----------------
Benefit obligation at end of period $ 121,111 $ 89,566 $ 90,780
================= ================ ================
Funded status $ (121,111) $ (89,566) $ (90,780)
Unrecognized net actuarial loss 36,382 12,965 12,920
Unrecognized prior service cost 1,333 1,496 1,473
----------------- ---------------- ----------------
Accrued postretirement benefit obligation (83,396) (75,105) (76,387)
Amount included in current liabilities 3,818 3,044 3,044
----------------- ---------------- ----------------
Noncurrent liability $ (79,578) $ (72,061) $ (73,343)
================= ================ ================
The discount rate used in determining the postretirement benefit
obligation was 6.75 percent at December 31, 2002 and 7.25 percent at October 31,
2001 and at December 31, 2001.
Multi-Employer Benefits
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 Benefit
Funds. Based on available information at December 31, 2002, the Company's
obligation (discounted at 6.75%) under the Act is estimated at approximately
$60.6 million. The Company's obligation at October 31, 2001 was $52.3 million.
The $8.3 million increase in obligation is primarily a result of a change in
discount rate from 7.25% at October 31, 2001 to 6.75% at December 31, 2002, and
an increase in per beneficiary premiums as determined by the funds. The Company
treats its obligation under the Benefit Act as a participation in a
multi-employer plan and records the cost of the Company's obligation as expense
as payments are assessed. The Company expense related to this obligation for the
years ended December 31, 2002 and October 31, 2001 and 2000, totaled $4.1
million, $5.0 million, and $3.6 million, respectively. For the two-month period
ended December 31, 2001 the Company expensed $0.7 million related to this
obligation.
12. 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.
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.
13. Equity Compensation Plans
Massey's executive stock plans provide for grants of non-qualified stock
options, incentive stock options, stock appreciation rights ("SARS") and
restricted stock awards. All executive stock plans are administered by the
Compensation Committee of the Board of Directors (the "Committee") comprised of
58
independent outside directors. Option exercise prices, determined by the
Committee, 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. Additionally, two
restricted stock plans exist for the purpose of providing non-employee directors
with grants of restricted stock upon initial election or appointment to the
Board of Directors and with annual grants of restricted stock. The restricted
stock shares and compensation expense related to these shares are included in
the "employee" totals discussed in this Note.
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 the year ended December 31, 2002 the Company issued 519,873
non-qualified stock options with annual vesting of 25% and 163,400 non-qualified
stock options that cliff vest after four years all of which expire in ten years.
During the year ended October 31, 2001 the Company issued 875,961 non-qualified
stock options with annual vesting of 25% and that expire in ten years. During
the year ended October 31, 2000, prior to the Spin-Off, 290,080 options (in
Fluor stock), were 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.
On November 1, 2001, 787,500 SARS were granted to Mr. Blankenship pursuant
to the Amended and Restated Employment Agreement between Massey Energy Company,
A.T. Massey Coal Company, Inc. and Don L. Blankenship dated as of November 1,
2001 (amended and restated as of July 16, 2002). These SARS have an exercise
price of $19.45 and vest as follows: 225,000 vested on October 31, 2002, while
225,000, 225,000 and 112,500 will vest on October 31, 2003, October 31, 2004,
and April 30, 2005, respectively. These SARS expire in ten years. No grants of
SARS were made to Massey employees during the fiscal years ended October 31,
2001 and 2000.
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 awards issued to employees under the plans totaled 477,987
shares and 266,411 shares for the years ended December 31, 2002 and October 31,
2001, respectively. Prior to the Spin-Off, Fluor Corporation restricted stock
issued to Massey employees totaled 31,390 shares for the year ended October 31,
2000 (117,618 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 2 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 years ended December 31, 2002, and October
31, 2001, and 2000, expenses related to Massey's various stock compensation
plans (with the exception of stock options) totaled $2.7 million, $5.8 million,
and $3.8 million, respectively, and $1.9 million for the two months ended
December 31, 2001. Under APB Opinion No. 25, no compensation cost is recognized
for the Company's stock option plans because vesting provisions are based only
on the passage of time and because the Company granted the options at an
exercise price equal to the average of the high and low of the quoted market
price of the Company's stock on the date of grant. Had the Company recorded
compensation expense using the accounting method recommended by SFAS No. 123,
net earnings and diluted earnings per share would have been reduced to the pro
forma amounts as follows:
59
---------------------------------------------------------------------
Year ended Two Months
Ended
---------------------------------------------------------------------
December 31, October 31, October 31, December 31,
2002 2001 2000 2001
---- ---- ---- ----
(in thousands, except
per share amounts)
Net (loss) earnings
As reported ($ 32,574) ($ 5,420) $ 78,531 ($ 14,801)
Pro forma ($ 34,709) ($ 6,795) $ 76,931 ($ 15,162)
Diluted net (loss)
earnings per share
As reported ($0.44) ($0.07) $ 1.07 ($0.20)
Pro forma ($0.47) ($0.09) $ 1.05 ($0.20)
The estimated fair value as of the date of grant for options granted to
Massey employees during the years ended December 31, 2002, and October 31, 2001
and 2000 was determined using the Black-Scholes option-pricing model based on
the following weighted average assumptions (assumptions applied in 2000 were
determined by Fluor):
2002 2001 2000
---- ---- ----
Expected option lives (years) 5 5 6
Risk-free interest rates 3.08% 4.29% 6.03%
Expected dividend yield 2.84% 0.81% 1.74%
Expected volatility 49.4% 37.1% 39.8%
The weighted average fair value of options granted by the Company during
the years ended December 31, 2002 and October 31, 2001 using the Black-Scholes
option-pricing model was $2.23 and $7.22, respectively. The weighted average
fair value of options granted by Fluor to Massey employees during 2000
determined using the Black-Scholes option-pricing model was $18.00 (prior to
conversion at the time of the Spin-Off).
The following table summarizes stock option activity:
Weighted Average
--------------------------------------
Exercise Price
Stock Options Per Share
------------- --------------
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
Expired or Cancelled (42,061) $ 19.14
Exercised (253,243) $ 11.28
- --------------------------------------------------------------------------------
Outstanding at December 31, 2001 2,021,703 $ 15.25
Granted 683,273 $ 5.79
Expired or Cancelled (264,772) $ 13.64
Exercised (125,689) $ 11.17
- --------------------------------------------------------------------------------
Outstanding at December 31, 2002 2,314,515 $ 12.86
60
Exercisable at:
October 31, 2000 (pre-conversion
shares) 257,850
October 31, 2001 1,243,903
December 31, 2001 1,083,704
December 31, 2002 1,075,763
Characteristics of outstanding stock options at December 31, 2002 are as
follows:
Outstanding Options Exercisable Options
---------------------------------------------------------------- ---------------------------------------
Weighted Average
Remaining
Range of Exercise Contractual Life Weighted Average Weighted Average
Price Number of Options (years) Exercise Price Number of Options Exercise Price
- ----------------- ----------------- ---------------- ---------------- ----------------- ----------------
$ 5.21 - 7.63 679,473 9.8 $ 5.78 --- ---
$10.57 - 10.93 528,721 6.7 $ 10.84 528,721 $ 10.84
$12.50 - 13.03 156,285 4.9 $ 12.79 142,464 $ 12.76
$14.56 - 18.86 208,812 3.1 $ 16.51 208,812 $ 16.51
$19.42 - 20.11 741,224 8.7 $ 19.78 195,766 $ 19.78
----------------- -----------------
$ 5.21 - 20.11 2,314,515 7.8 $ 12.86 1,075,763 $ 13.82
================= ================ ================ ================= ================
At December 31, 2002, there are 4,878,326 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.
14. Future Minimum 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 December 31, 2002, and October 31, 2001 and 2000, was $53.4 million, $54.3
million and $28.4 million, respectively, and $8.5 million for the two-month
period ended December 31, 2001.
In December 2002, the Company entered into a sale-leaseback transaction
involving certain mining equipment. The Company received proceeds of $17
million, with no resulting gain or loss on the transaction. The assets were
leased back from the purchaser over a period of 4 years. The lease contains a
renewal option at lease termination and a purchase option at an amount
approximating fair value at lease termination. The lease is being accounted for
as an operating lease. Future payments required under the lease are included
within the table below.
The following presents future minimum rental payments, by year, required
under operating leases with initial terms greater than one year, in effect at
December 31, 2002:
Minimum Rentals
Year (in thousands)
2003 $ 61,486
2004 55,671
2005 51,135
2006 32,947
2007 8,040
Thereafter 3,063
--------------
$ 212,342
==============
15. Contingencies and Commitments
Force Majeure Litigation
Massey's operations experienced various events of force majeure in 2000 and
2001, including:
61
o The impoundment failure at Martin County on October 11, 2000 causing
the destruction of the raw coal beltline feeding the preparation plant
and leading to the immediate closure of the slurry impoundment by
order of regulatory authorities. As a result, over 1 million shippable
tons of coal could not be processed through the Martin County
preparation plant for the six months that it was shut down as a result
of the spill;
o Adverse geological conditions in several of the Company's longwall
mines, including severe roof falls that forced the closure of the
Upper Cedar Grove mine of the Independence resource group, flooding
conditions in the Marfork resource group's Ellis Eagle mine, adverse
sandstone intrusions in both the Ellis Eagle and Performance resource
group's Upper Big Branch longwall mines, and a significant roof fall
on the mainline belt and other adverse conditions at the Nicholas
Energy resource group's Jerry Fork longwall;
o Various weather related problems in May, June and July, 2001 which
caused power outages and flooding at several Massey operations;
o Various underground disruptions such as a roof fall that curtailed
transportation of coal from the Independence resource group's Hernshaw
mine to the Elk Run resource group's Chess Processing preparation
plant for approximately six weeks, and subsidence at the Twilight
surface mine of the Progress resource group that covered a highwall
miner for more than three weeks; and
o Labor shortages, especially in trained and qualified underground
workers, particularly electricians.
As a result, Massey declared events of force majeure under a number of its
contracts and sent reduced shipments to affected customers. The Company was able
to resolve most shortfalls with its customers without dispute. However, the
following dispute occurred and is not yet resolved:
On April 16, 2002, Appalachian Power Company, a subsidiary of American
Electric Power, filed suit against Massey's subsidiaries Central West
Virginia Energy Company, Massey Coal Sales Company, Inc. and A.T. Massey
Coal Company, Inc. in the Franklin County, Ohio Court of Common Pleas. The
suit alleges that the Company improperly claimed force majeure with respect
to a tonnage shortfall under its agreements with Appalachian Power in 2000
and 2001. The complaint further alleges that the Company's claim of force
majeure constitutes fraud, and seeks to recover profits made by it on sales
to other customers of the coal Appalachian Power claims should have been
delivered to it. By order entered July 25, 2002, the court dismissed the
fraud claim, however, on December 20, 2002, the court granted Appalachian
Power leave to file a second amended complaint to reassert the fraud claim.
The trial for this matter is currently scheduled for April 28, 2003.
Discovery is ongoing and Appalachian Power has indicated on a preliminary
basis that it intends to seek approximately $20.3 Million in damages.
Shareholder Derivative Suit
On August 5, 2002, a shareholder derivative complaint was filed in the
Boone County, West Virginia, Circuit Court naming as defendants the Company,
each of the Company's directors (including Don L. Blankenship, Chairman,
President and Chief Executive Officer), James L. Gardner, Executive Vice
President and Chief Administrative Officer, Jeffrey M. Jarosinski, Vice
President -Finance and Chief Financial Officer, Madeleine M. Curle, Vice
President - Human Resources, and Bennett K. Hatfield, former Executive Vice
President and Chief Operating Officer. The complaint alleges (i) breach of
fiduciary duties against all of the defendants for refusing to cause the Company
to comply with environmental, labor and securities laws, and (ii) improper
insider trading by Don L. Blankenship, Jeffrey M. Jarosinski, Madeleine M. Curle
and Bennett K. Hatfield. The Company and the other defendants removed the case
to Federal District Court in Charleston, West Virginia, but the case has now
been remanded to the Boone County Circuit Court. The case is still in very early
procedural stages. The Company intends to vigorously pursue defense of this
case.
Harman Case
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
June 1998, Harman filed a breach of contract action against Wellmore in Buchanan
County, Virginia, Circuit Court. Harman claimed that Wellmore breached the CSA
by declaring a force majeure event and reducing the amount of coal to be
purchased from Harman. On August 24, 2000, a jury found that Wellmore had
breached its contract and awarded Harman $6 million in damages. After
unsuccessfully pursuing an appeal, on November 12, 2002, Massey paid Harman $6.0
million plus post-judgment interest of approximately $1.2 million, in full
satisfaction of the judgment.
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. On August 1, 2002, the jury in the case
awarded the plaintiffs $50 million in compensatory and punitive damages. Massey
is vigorously pursuing post-judgment 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. The Company accrued a liability
with respect to these cases of $31.0 million, excluding interest, which the
Company believes is a fair estimate of the eventual total payout relating to
both the Virginia and West Virginia actions. After the payment of the Virginia
verdict, the remaining accrual is $25.0 million. as of December 31, 2002, which
is included in Other current liabilities.
Elk Run Dust Case
On February 2, 2001, approximately 160 residents of the Town of Sylvester,
West Virginia, filed suit in the Circuit Court of Boone County, West Virginia
against the Company and its subsidiary, Elk Run Coal Company, Inc., alleging
that Elk Run's operations create noise, light and dust constituting a nuisance
and causing damage to the community and seeking to recover compensatory and
punitive damages. On February 7, 2003, a jury awarded approximately $475,000 in
compensatory damages to the plaintiffs but rejected the plaintiffs' request for
punitive damages. The plaintiffs' claim for attorneys' fees is pending. Upon
entry of a final order, either party has four months to appeal the case to the
West Virginia Supreme Court of Appeals. At December 31, 2002, the Company had
recorded reserves for the verdict and the Company's best estimate of the
plaintiffs' claim for attorneys' fees.
62
West Virginia Flooding Cases
Five of the Company's subsidiaries have been named, among others, in 17
separate complaints filed in Boone, Fayette, Kanawha, McDowell, Mercer, Raleigh
and Wyoming Counties, West Virginia. These cases collectively include numerous
plaintiffs who filed suit on behalf of themselves and others similarly situated,
seeking damages for property damage and personal injuries arising out of
flooding that occurred in southern West Virginia in July of 2001. The plaintiffs
have sued coal, timber, railroad and land companies under the theory that
mining, construction of haul roads and removal of timber caused natural surface
waters to be diverted and interrupted in an unnatural way, thereby causing
damage to the plaintiffs. The West Virginia Supreme Court has ruled that these
cases, including several additional flood damage cases not involving the
Company's subsidiaries, be handled pursuant to the Court's Mass Litigation
rules. As a result of this ruling, the cases have been transferred to the
Circuit Court of Raleigh County in West Virginia to be handled by a panel
consisting of three circuit court judges. The panel will, among other things,
determine whether the individual cases should be consolidated or returned to
their original circuit courts. While the outcome of this litigation is subject
to uncertainties, based on our preliminary evaluation of the issues and the
potential impact on us, we believe this matter will be resolved without a
material adverse effect on our cash flows, financial condition or results of
operations.
Water Claims Litigation
Two cases were filed in the Mingo County, West Virginia Circuit Court
alleging that Massey's Delbarton Mining Company subsidiary's mining activities
destroyed nearby resident plaintiffs' water supplies. One case was filed on
behalf of 54 plaintiffs on July 26, 2002, and the other was filed on behalf of
134 plaintiffs on July 1, 2002. Delbarton has already provided many of the
plaintiffs with a replacement water source. The case is in the very early
procedural stages and the trial is scheduled for October 2003.
Trucking Litigation
On January 7, 2003, Coal River Mountain Watch, an advocacy group
representing local residents in the Counties of Boone, Raleigh and Kanawha, West
Virginia, and other plaintiffs, filed suit in the Circuit Court of Kanawha
County, West Virginia against various coal and transportation companies
(including various Massey subsidiaries) alleging that the defendants illegally
transport coal in overloaded trucks causing damage to state roads and
interfering with the plaintiffs' use and enjoyment of their properties and their
right to use the public roads, and seeking injunctive relief and damages
(including punitive damages).
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 complete. As of December 31, 2002, Massey incurred to date a
total of approximately $58.3 million of cleanup costs in connection with the
spill, $52.2 million of which have been paid directly or reimbursed by insurance
companies. In the consolidated balance sheet as of December 31, 2002 and October
31, 2001, the accruals related to this matter of $9.9 million and $11.5 million,
respectively, are included in Other current liabilities, and probable insurance
recoveries of $15.1 million and $20.5 million, respectively, are included in
Trade and other accounts receivable. Massey continues to seek insurance
reimbursement of any and all covered costs. Most of the claims, fines, penalties
and lawsuits from the impoundment failure have been satisfied or settled. The
remaining issues (none of which is considered material) are:
(1) there are two remaining suits with 8 plaintiffs (one seeking class
certification) seeking various unquantified damages allegedly
resulting from the October 11, 2000 incident.
(2) 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. The court ruled that
WVDEP cannot collect statutory penalties, but has not yet ruled
whether WVDEP can continue to assert its claims for punitive damages.
Massey is continuing to defend this action vigorously and believes
that it has numerous valid defenses to the claims.
(3) 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 penalty amount.
(4) On October 11, 2002, the Town of Fort Gay, West Virginia filed suit
against the Company and Martin County Coal Corporation, alleging that
it's water treatment and distribution plant was damaged when water,
allegedly damaged by the discharge from the Martin County impoundment,
was pumped into the facility. Massey denies the allegations and is
defending the action vigorously.
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.
Valley Fill Litigation
On May 8, 2002, the United States District Court for the Southern District
of West Virginia issued an order in Kentuckians for the Commonwealth v.
Rivenburgh enjoining the Huntington, West Virginia office of the U.S. Army Corps
of Engineers from issuing permits under Section 404 of the Clean Water Act for
the construction of valley fills for the disposal of overburden from mountaintop
mining operations solely for the purpose of waste disposal. The court held that
the filling of these waters solely for waste disposal is a violation of the
Clean Water Act. The court's injunction also prohibits the issuance of permits
authorizing fill activities associated with types of mining activities other
than mountaintop mining where the primary purpose or use of those fill
activities is the disposal of waste. Such activities might include those
associated with slurry impoundments and coal refuse disposal areas.
On January 29, 2003, the Fourth Circuit Federal Court of Appeals reversed
the district court's decision and lifted the injunction. The time for filing a
possible appeal has not yet expired. If the decision of the Court of Appeals
were reversed and the injunction reinstated, the effect would be to make
mountaintop mining uneconomical in those areas subject to the injunction and
call into question the ability of the Company to obtain permits with respect to
other mining activities that use valley fills.
63
* * * * * * * *
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.
Coal Purchase Commitments
As of December 31, 2002, the Company had commitments to purchase from
external production sources 2.0 million, 0.7 million, and 0.7 million tons of
coal in 2003, 2004, and 2005, respectively.
16. Quarterly Information (Unaudited)
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 2002 and two-month transition period ended December
31, 2001 is, by means of this filing, being restated, except for the fourth
quarter of 2002, to reflect these adjustments.
The adjustments are as follows:
The Consolidated Financial Statements for the two-month transition period
ended December 31, 2001 are restated to remove 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 is now reflected in
the fourth quarter of the Company's fiscal year ended October 31, 2001.
The Consolidated Financial Statements for the two-month transition period
ended December 31, 2001 are restated to remove a $2.5 million pre-tax charge in
connection with a wrongful employee discharge lawsuit. This charge is now
reflected in the fourth quarter of the Company's fiscal year ended October 31,
2001.
The Consolidated Financial Statements for the two-month transition period
ended December 31, 2001 and the first quarter 2002 are restated to record in the
two-month transition period ended December 31, 2001, a reduction in the
Company's bad debt reserves of $3 million pre-tax with respect to Enron
Corporation, previously recorded in the first quarter 2002.
64
The Consolidated Financial Statements for each quarter of 2002 and the
two-month transition period ended December 31, 2001 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 reduced pre-tax income in each quarter of 2002 by $0.4 million. The
adjustment was not material for the two-month transition period ended December
31, 2001.
Set forth below is the Company's quarterly financial information for the
previous two fiscal years and two-month transition period ended December 31,
2001. Included below are the previously reported as well as restated amounts for
each of the following periods: three-months ended September 30, 2002, June 30,
2002 and March 31, 2002; and two-month transition period ended December 31,
2001.
Three months ended
------------------------------------------------------------------------------------------------
(In thousands, except per March 31, June 30, September 30, December 31,
share amounts) 2002 (1) 2002 (2) 2002 (3) 2002 (4)
------------------------------------------------------------------------------------------------
Previously Previously Previously Previously
Reported Restated Reported Restated Reported Restated Reported (9) Restated
-------- -------- -------- -------- -------- -------- ------------ --------
Total revenue $ 341,833 $ 392,551 $ 347,732 $ 402,507 $ 363,039 $ 424,441 $ 410,192 $ 410,596
Income (loss) from
operations (229) (3,623) (17,047) (17,398) 6,993 6,642 (12,217) (12,309)
Loss before taxes (7,047) (10,441) (24,990) (25,341) (1,698) (2,049) (19,597) (19,689)
Net loss (2,143) (4,213) (16,242) (16,456) (1,103) (1,317) (10,531) (10,587)
Loss per share:
Basic and diluted $ (0.03) $ (0.06) $ (0.22) $ (0.22) $ (0.01) $ (0.02) $ (0.14) $ (0.14)
65
Two months ended
-------------------------
(In thousands, except per December 31,
share amounts) 2001 (8)
-------------------------
Previously
Reported Restated
-------- --------
Total revenue $ 211,422 $ 246,443
Loss from operations (31,652) (19,209)
Loss before taxes (35,967) (23,524)
Net loss (22,391) (14,801)
Loss per share:
Basic and diluted $ (0.30) $ (0.20)
Three months ended
-------------------------------------------------
(In thousands, except per January 31, April 30, July 31, October 31,
share amounts) 2001 2001 (5) 2001 (6) 2001 (7)
-------------------------------------------------
Total revenue $ 324,728 $ 359,644 $ 354,990 $ 392,499
Income (loss) from operations 4,248 9,025 (5,081) 1,354
Earnings (loss) before taxes (1,558) 3,907 (12,965) (5,305)
Net earnings (loss) (951) 2,482 (8,993) 2,042
Earnings (loss) per share:
Basic and diluted $ (0.01) $ 0.03 $ (0.12) $ 0.03
(1) Loss for the first quarter 2002 includes income in the amount of $5.1
million pre-tax received from one large customer for a contract
buyout; a reduction in the Company's bad debt reserves of $2.5 million
pre-tax for a receivable from a large bankrupt customer,
Wheeling-Pittsburgh Steel Corporation, due to a long-term repayment
agreement; and a tax refund for the settlement of a state tax dispute in
the amount of $2.4 million, net of federal tax.
(2) Loss for the second quarter 2002 include a charge of $25.6 million
pre-tax related to an adverse jury verdict in the West Virginia Harman
Mining Corporation action. See Note 15 for further information.
Additionally, in June 2002, the Company sold an additional interest in
its synfuel-producing subsidiary, Appalachian Synfuel, LLC. See Note 5
for further information.
(3) Loss for the third quarter of 2002 include a charge in the amount of
$13.2 million pre-tax related to the write off of capitalized
development costs at certain idled mines. See Note 2 for further
information.
(4) Earnings for the fourth quarter of 2002 include a charge in the amount
of $10.6 million pre-tax related to an arbitration award in a contract
dispute. See Note 17 for further information.
(5) On March 15, 2001, the Company sold a substantial interest in its
synfuel producing subsidiary, Appalachian Synfuel, LLC. See Note 5 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.
(6) 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.
(7) 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.
(8) Earnings for the two-month transition period ended December 31, 2001
include a charge of $3.9 million pre-tax related to the bankruptcy of a
substantial customer, Enron Corporation.
(9) As reported within the Company's Press Release filed on Form 8-K on
February 5, 2003.
66
17. Subsequent Events
Receivables Securitization
On January 31, 2003, the Company entered into a borrowing program, secured
by its accounts receivable. The amount eligible to be borrowed under the program
is up to $80 million depending on the level of eligible receivables and
restrictions on concentrations of receivables. At February 28, 2003, the
borrowings outstanding under the program totaled $54.0 million. The program
expires in July 2004. The receivables outstanding under these programs and the
corresponding debt will be included as "Trade accounts receivables" and
"Long-term debt," respectively, on the Company's consolidated balance sheets in
subsequent accounting periods. As collections reduce previously pledged
interests, new receivables will be pledged. A portion of the cost of the
accounts receivable secured borrowing programs is based on the creditors' level
of investment and borrowing costs. The total cost of the programs will be
included in interest expense on future statements of income.
Duke Arbitration
On December 14, 2001, Duke Energy made a demand for arbitration, disputing
the Company's claim that an event of force majeure had occurred and claiming
$20.5 million in damages resulting from coal tonnage shortfalls. In December
2002, the dispute went to arbitration. On January 23, 2003, the arbitrators
awarded Duke Energy $10.6 million on its claim, which Massey has paid. Charges
for such payment were recorded in the fourth quarter of 2002.
67
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 December 31, 2002.
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 December 31, 2002.
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 December 31, 2002.
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 December 31, 2002.
Item 14. Controls and Procedures.
We have established disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to the officers who certify the Company's financial
reports and to other members of senior management and the Board of Directors.
Based on their evaluation as of a date within 90 days of the filing date
of this Annual Report on Form 10-K, the principal executive officer and
principal financial officer of Massey Energy Company have concluded that Massey
Energy Company's disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective
to ensure that the information required to be disclosed by Massey Energy Company
in reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms.
There were no significant changes in Massey Energy Company's internal
controls or in other factors that could significantly affect those controls
subsequent to the date of their most recent evaluation.
Part IV
Item 15. 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 December
31, 2002, October 31, 2001 and 2000, and the two month periods ended December
31, 2001 and 2000 (unaudited)
68
Consolidated Balance Sheets at December 31, 2002 and October 31, 2001
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
31, 2002, October 31, 2001 and 2000, and the two month periods ended December
31, 2001 and 2000 (unaudited)
Consolidated Statements of Shareholders' Equity for the Fiscal Years
Ended December 31, 2002, October 31, 2001 and 2000,and the two month periods
ended December 31, 2001 and 2000 (unaudited)
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: Except as set forth 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 August 1, 2002) of Massey
Energy Company [filed as Exhibit 3.1 to Massey's quarterly report on
Form 10-Q for the period ended June 30, 2002 and incorporated by
reference]
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]
4.3 First Supplemental Indenture, dated as of the 9th day of February,
2001, between Massey Energy Company (successor by name change to
Fluor Corporation) and Bankers Trust Company, supplementing that
certain Indenture dated as of February 18, 1997 [filed as Exhibit
10.2 to Massey's quarterly report on Form 10-Q for the period ended
March 31, 2002 and incorporated by reference]
10.1 Amended and Restated Credit Agreement dated as of November 26, 2002,
among Massey Energy Company, as Borrower, each domestic Subsidiary
of Massey, as Guarantors, CitiCorp USA, Inc., as Administrative
Agent and Collateral Agent, PNC Bank, National Association, as
Syndication Agent, Wachovia Bank, National Association, as
Documentation Agent, and the lenders party thereto, for a maximum
principal amount at any one time outstanding not to exceed
$250,000,000
10.2 First Amendment to Amended and Restated Credit Agreement dated as of
January 30, 2003, among Massey Energy Company, as Borrower, each
domestic Subsidiary of Massey, as Guarantors, CitiCorp USA, Inc., as
Administrative Agent and Collateral Agent, PNC Bank, National
Association, as Syndication Agent, Wachovia Bank, National
Association, as Documentation Agent, and the lenders party thereto,
for a maximum principal amount at any one time outstanding not to
exceed $250,000,000
10.3 Credit and Security Agreement dated as of January 31, 2003, among
Massey Receivables Corporation, as Borrower, A. T. Massey Coal
Company, Inc., as Servicer, Blue Ridge Asset Funding Corporation,
the Liquidity Banks from time to time party hereto and Wachovia
Bank, National Association, as Agent
10.4 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]
10.5 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]
10.6 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]
69
10.7 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]
10.8 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]
10.9 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]
10.10 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]
10.11 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]
10.12 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]
10.13 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]
10.14 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]
10.15 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]
10.16 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]
10.17 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]
10.18 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]
10.19 Amended and Restated Employment Agreement between Massey Energy
Company, A. T. Massey Coal Company, Inc. and Don L. Blankenship
dated as of November 1, 2001(amending and restating on July 16,
2002, the Employment Agreement between Massey Energy Company, A. T.
Massey Coal Company, Inc. and Don L. Blankenship dated as of
November 1, 2001) [filed as Exhibit 3.1 to Massey's quarterly report
on Form 10-Q for the period ended June 30, 2002 and incorporated by
reference]
10.20 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]
10.21 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]
10.22 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]
10.23 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
23 Consent of Independent Auditors
24 Manually signed Powers of Attorney executed by Massey directors
70
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 February 5, 2003 announcing
Massey's financial results for the fiscal year ended December 31,
2002.
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
March 31, 2003
By: /s/ K. J. Stockel
-------------------------------------
K. J. Stockel,
Senior Vice President
and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Principal Executive Officer and Director:
/s/ D. L. Blankenship Chairman, Chief Executive Officer and March 31, 2003
- -------------------------------------- President
D. L. Blankenship
Principal Financial Officer:
/s/ K. J. Stockel Senior Vice President and Chief March 31, 2003
- -------------------------------------- Financial Officer
K. J. Stockel
Principal Accounting Officer
/s/ E. B. Tolbert Controller March 31, 2003
- --------------------------------------
E. B. Tolbert
Other Directors:
* Director March 31, 2003
- --------------------------------------
E. G. Gee
* Director March 31, 2003
- --------------------------------------
W. R. Grant
* Director March 31, 2003
- --------------------------------------
J. H. Harless
* Director March 31, 2003
- --------------------------------------
B. R. Inman
* Director March 31, 2003
- --------------------------------------
D. R. Moore
* Director March 31, 2003
- --------------------------------------
M. R. Seger
By: March 31, 2003
-----------------------------------
R. E. Davis
Attorney-in-fact
* Manually signed Powers of Attorney authorizing R. Eberley Davis, James L.
Gardner and Kenneth J. Stockel, and each of them, to sign the annual report on
Form 10-K for the fiscal year ended December 31, 2002 and any amendments thereto
as attorneys-in-fact for certain directors and officers of the registrant are
included herein as Exhibits 24.
71
CERTIFICATIONS
I, Kenneth J. Stockel, certify that:
1. I have reviewed this annual report on Form 10-K of Massey Energy Company;
2. Based on my knowledge, this 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 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 annual report (the "Evaluation Date"); and
c) presented in this 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
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
72
CERTIFICATIONS
I, Don L. Blankenship, certify that:
1. I have reviewed this annual report on Form 10-K of Massey Energy Company;
2. Based on my knowledge, this 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 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 annual report (the "Evaluation Date"); and
c) presented in this 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
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
President, Chairman and Chief
Executive Officer
73
MASSEY ENERGY COMPANY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In Thousands of Dollars)
Amounts
Balance Charged
at to Costs Balance at
Beginning and Deductions Other End of
Description of Period Expenses (1) (2) Period
- ------------------------------------------------------ ----------- ----------- ------------ --------- ------------
YEAR ENDED DECEMBER 31, 2002
Reserves deducted from asset accounts:
Allowance for accounts and notes receivable $ 11,281 $ (2,706) $ - $ 200 $ 8,775
TWO MONTHS ENDED DECEMBER 31, 2001
Reserves deducted from asset accounts:
Allowance for accounts and notes receivable 9,848 1,433 - 11,281
-
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
(1) Reserves utilized, unless otherwise indicated.
(2) Reclassifications, unless otherwise indicated.
74