Attached files
file | filename |
---|---|
EX-4.3 - SUPPLEMENTAL INDENTURE (6.875% NOTES) - MASSEY ENERGY CO | exhibit43.htm |
EX-4.2 - SUPPLEMENTAL INDENTURE (6.625% NOTES) - MASSEY ENERGY CO | exhibit42.htm |
EX-4.4 - SUPPLEMENTAL INDENTURE (3.25% NOTES) - MASSEY ENERGY CO | exhibit44.htm |
EX-4.1 - SUPPLEMENTAL INDENTURE (2.25% NOTES) - MASSEY ENERGY CO | exhibit41.htm |
EX-31.1 - SECTION 302 CEO CERTIFICATION - MASSEY ENERGY CO | exhibit311.htm |
EX-32.2 - SECTION 906 CFO CERTIFICATION - MASSEY ENERGY CO | exhibit322.htm |
EX-32.1 - SECTION 906 CEO CERTIFICATION - MASSEY ENERGY CO | exhibit321.htm |
EX-31.2 - SECTION 302 CFO CERTIFICATION - MASSEY ENERGY CO | exhibit312.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
____________________
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended September 30, 2009
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. 001-07775
____________________
MASSEY
ENERGY COMPANY
(Exact
name of registrant as specified in its charter)
____________________
Delaware
|
95-0740960
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification Number)
|
4
North 4th Street, Richmond, Virginia
|
23219
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(804)
788-1800
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer x | Accelerated filer ¨ |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
As of
October 20, 2009, there were 85,545,018 shares of common stock, $0.625 par
value, outstanding.
1
MASSEY
ENERGY COMPANY
FORM
10-Q
For
the Quarterly Period Ended September 30, 2009
TABLE
OF CONTENTS
|
PAGE
|
PART I: FINANCIAL
INFORMATION
|
|
Item
1. Financial Statements
|
3
|
Item
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
|
20
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
32
|
Item
4. Controls and Procedures
|
33
|
PART II: OTHER
INFORMATION
|
|
Item
1. Legal Proceedings
|
33
|
Item
1A. Risk Factors
|
34
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
35
|
Item
6. Exhibits
|
35
|
SIGNATURES
|
37
|
2
PART I: FINANCIAL
INFORMATION
Item
1. Financial Statements
MASSEY
ENERGY COMPANY
|
||||||||||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
|
||||||||||||||||
(In
Thousands, Except Per Share Amounts)
|
||||||||||||||||
UNAUDITED
|
||||||||||||||||
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
As
Adjusted
|
As
Adjusted
|
|||||||||||||||
Revenues
|
||||||||||||||||
Produced
coal revenue
|
$ | 535,531 | $ | 666,440 | $ | 1,819,777 | $ | 1,919,976 | ||||||||
Freight
and handling revenue
|
52,523 | 81,068 | 171,253 | 229,570 | ||||||||||||
Purchased
coal revenue
|
14,570 | 4,484 | 43,741 | 22,025 | ||||||||||||
Other
revenue
|
38,936 | 11,304 | 72,504 | 63,188 | ||||||||||||
Total
revenues
|
641,560 | 763,296 | 2,107,275 | 2,234,759 | ||||||||||||
Costs
and expenses
|
||||||||||||||||
Cost
of produced coal revenue
|
431,697 | 500,387 | 1,462,263 | 1,418,275 | ||||||||||||
Freight
and handling costs
|
52,523 | 81,068 | 171,253 | 229,570 | ||||||||||||
Cost
of purchased coal revenue
|
18,366 | 4,349 | 39,061 | 19,783 | ||||||||||||
Depreciation,
depletion and amortization, applicable to:
|
||||||||||||||||
Cost
of produced coal revenue
|
66,105 | 64,393 | 204,524 | 185,200 | ||||||||||||
Selling,
general and administrative
|
164 | 817 | 2,025 | 2,569 | ||||||||||||
Selling,
general and administrative
|
21,549 | 2,820 | 63,420 | 62,815 | ||||||||||||
Other
expense
|
608 | 1,049 | 1,970 | 2,457 | ||||||||||||
Litigation
charge
|
- | 5,835 | - | 251,111 | ||||||||||||
Loss
on refinancing
|
- | 9,088 | - | 9,088 | ||||||||||||
Loss
(gain) on derivative instruments
|
4,765 | - | (4,479 | ) | - | |||||||||||
Total
costs and expenses
|
595,777 | 669,806 | 1,940,037 | 2,180,868 | ||||||||||||
Income
before interest and taxes
|
45,783 | 93,490 | 167,238 | 53,891 | ||||||||||||
Interest
income
|
590 | 4,742 | 12,274 | 13,549 | ||||||||||||
Interest
expense
|
(25,493 | ) | (29,843 | ) | (76,182 | ) | (71,606 | ) | ||||||||
Loss
on short-term investment
|
- | (6,537 | ) | - | (6,537 | ) | ||||||||||
Income
(loss) before taxes
|
20,880 | 61,852 | 103,330 | (10,703 | ) | |||||||||||
Income
tax (expense) benefit
|
(4,422 | ) | (10,294 | ) | (23,254 | ) | 10,857 | |||||||||
Net
income
|
$ | 16,458 | $ | 51,558 | $ | 80,076 | $ | 154 | ||||||||
Net
income per share
|
||||||||||||||||
Basic
|
$ | 0.19 | $ | 0.62 | $ | 0.94 | $ | 0.00 | ||||||||
Diluted
|
$ | 0.19 | $ | 0.61 | $ | 0.94 | $ | 0.00 | ||||||||
Shares
used to calculate Net income per share
|
||||||||||||||||
Basic
|
84,930 | 82,623 | 84,887 | 80,851 | ||||||||||||
Diluted
|
85,662 | 83,959 | 85,371 | 82,070 | ||||||||||||
Dividends
per share
|
$ | 0.06 | $ | 0.05 | $ | 0.18 | $ | 0.15 |
3
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||
(In
Thousands, Except Per Share Amounts)
|
||||||||
UNAUDITED
|
||||||||
September
30,
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
As
Adjusted
|
||||||||
ASSETS
|
||||||||
Current
Assets
|
||||||||
Cash
and cash equivalents
|
$ | 639,992 | $ | 606,997 | ||||
Short-term
investment
|
15,121 | 39,383 | ||||||
Trade
and other accounts receivable, less allowance of $644 and
$873,
|
||||||||
respectively
|
197,433 | 233,266 | ||||||
Inventories
|
229,829 | 233,168 | ||||||
Income
taxes receivable
|
- | 6,621 | ||||||
Other
current assets
|
193,744 | 116,061 | ||||||
Total
current assets
|
1,276,119 | 1,235,496 | ||||||
Net
Property, Plant and Equipment
|
2,339,623 | 2,297,696 | ||||||
Other
Noncurrent Assets
|
135,340 | 139,186 | ||||||
Total
assets
|
$ | 3,751,082 | $ | 3,672,378 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
Liabilities
|
||||||||
Accounts payable, principally trade
and bank overdrafts
|
$ | 168,656 | $ | 244,201 | ||||
Short-term debt
|
1,593 | 1,976 | ||||||
Payroll
and employee benefits
|
63,826 | 56,959 | ||||||
Income
taxes payable
|
1,489 | - | ||||||
Other
current liabilities
|
192,774 | 201,017 | ||||||
Total
current liabilities
|
428,338 | 504,153 | ||||||
Noncurrent
Liabilities
|
||||||||
Long-term debt
|
1,322,726 | 1,310,181 | ||||||
Deferred income
taxes
|
189,261 | 177,294 | ||||||
Pension
obligation
|
66,236 | 63,304 | ||||||
Other
noncurrent liabilities
|
533,173 | 490,834 | ||||||
Total
noncurrent liabilities
|
2,111,396 | 2,041,613 | ||||||
Total
liabilities
|
2,539,734 | 2,545,766 | ||||||
Shareholders’
Equity
|
||||||||
Capital
stock
|
||||||||
Preferred – authorized 20,000,000
shares without par value; none issued
|
- | - | ||||||
Common
– authorized 150,000,000 shares of $0.625 par value;
issued
|
||||||||
85,544,413 and 85,447,970 shares,
respectively
|
53,456 | 53,378 | ||||||
Additional capital
|
555,708 | 542,519 | ||||||
Retained earnings
|
696,870 | 632,077 | ||||||
Accumulated other comprehensive
loss
|
(94,686 | ) | (101,362 | ) | ||||
Total
shareholders’ equity
|
1,211,348 | 1,126,612 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 3,751,082 | $ | 3,672,378 |
See Notes
to Condensed Consolidated Financial Statements
4
MASSEY
ENERGY COMPANY
|
||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
(In
Thousands)
|
||||||||
UNAUDITED
|
||||||||
Nine
Months Ended September 30,
|
||||||||
2009
|
2008
|
|||||||
As
Adjusted
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 80,076 | $ | 154 | ||||
Adjustments
to reconcile Net income to Cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation,
depletion and amortization
|
206,549 | 187,769 | ||||||
Share-based
compensation expense
|
9,651 | 8,590 | ||||||
Amortization
of bond discount
|
14,407 | 4,368 | ||||||
Deferred
income taxes
|
10,122 | (11,798 | ) | |||||
Gain
on disposal of assets
|
(12,017 | ) | (1,699 | ) | ||||
Gain
on reserve exchange
|
(24,922 | ) | (32,449 | ) | ||||
Loss
on financing transactions
|
- | 15,178 | ||||||
Net
change in fair value of derivative instruments
|
(22,598 | ) | - | |||||
Unrealized
loss on short-term investment
|
- | 6,537 | ||||||
Asset
retirement obligations accretion
|
10,515 | 8,883 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Decrease
(increase) in accounts receivable
|
49,319 | (124,484 | ) | |||||
Decrease
(increase) in inventories
|
3,339 | (18,535 | ) | |||||
(Increase)
decrease in other current assets
|
(57,537 | ) | 1,173 | |||||
(Increase)
decrease in other assets
|
(1,068 | ) | 2,568 | |||||
(Decrease)
increase in accounts payable and bank overdrafts
|
(75,545 | ) | 53,454 | |||||
Increase
in accrued income taxes
|
8,110 | 14,979 | ||||||
Increase
in other accrued liabilities
|
3,020 | 304,988 | ||||||
Increase
in pension obligation
|
16,140 | 361 | ||||||
Increase
in other noncurrent liabilities
|
17,980 | 9,613 | ||||||
Asset
retirement obligations payments
|
(3,431 | ) | (3,617 | ) | ||||
Cash
provided by operating activities
|
232,110 | 426,033 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Capital
expenditures
|
(222,970 | ) | (532,020 | ) | ||||
Reclassification
of cash and cash equivalent to short-term investment
|
- | (217,900 | ) | |||||
Proceeds
from redemption of Short-term investment
|
24,262 | - | ||||||
Proceeds
from sale of assets
|
15,704 | 6,783 | ||||||
Cash
utilized by investing activities
|
(183,004 | ) | (743,137 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Issuance
of common stock
|
- | 258,338 | ||||||
Repayments
of capital lease obligations
|
(2,175 | ) | (1,459 | ) | ||||
Proceeds
from issuance of 3.25% convertible senior notes
|
- | 674,136 | ||||||
Tender
payment for 6.625% senior notes
|
- | (322,139 | ) | |||||
Redemption
of 4.75% convertible senior notes
|
(70 | ) | - | |||||
Cash
dividends paid
|
(15,283 | ) | (11,986 | ) | ||||
Proceeds
from stock options exercised
|
1,190 | 16,519 | ||||||
Excess
income tax benefit from stock option exercises
|
227 | 4,807 | ||||||
Cash
(utilized) provided by financing activities
|
(16,111 | ) | 618,216 | |||||
Increase
in cash and cash equivalents
|
32,995 | 301,112 | ||||||
Cash
and cash equivalents at beginning of period
|
606,997 | 365,220 | ||||||
Cash
and cash equivalents at end of period
|
$ | 639,992 | $ | 666,332 |
See Notes
to Condensed Consolidated Financial Statements
5
|
Notes
to Condensed Consolidated Financial
Statements
|
|
(1)
|
Significant
Accounting Policies
|
Basis
of Presentation
The
condensed consolidated financial statements do not include footnotes and certain
financial information normally presented annually under accounting principles
generally accepted in the United States and, therefore, should be read in
conjunction with the Annual Report on Form 10-K of Massey Energy Company (“we,”
“our,” “us” or the “Company”) for the year ended December 31, 2008. Accounting
measurements at interim dates inherently involve greater reliance on estimates
than at year-end. The results of operations for the quarterly period ended
September 30, 2009 are not necessarily indicative of results that can be
expected for the fiscal year ending December 31, 2009.
The
condensed consolidated financial statements included herein are unaudited;
however, the financial statements contain all adjustments (consisting of normal
recurring accruals), which, in our opinion, are necessary to present fairly our
consolidated financial position at September 30, 2009, our consolidated results
of operations for the three and nine months ended September 30, 2009 and 2008,
and cash flows for the nine months ended September 30, 2009 and 2008, in
conformity with accounting principles generally accepted in the United States
(“GAAP”).
The
condensed consolidated financial statements include our accounts and the
accounts of our wholly owned and sole, direct operating subsidiary, A.T. Massey
Coal Company, Inc. (“A.T. Massey”), and A.T. Massey’s wholly and majority owned
direct and indirect subsidiaries. Significant intercompany transactions and
accounts are eliminated in consolidation. We have no independent assets or
operations. We do not have a controlling interest in any separate independent
operations. Investments in business entities in which we do not have control,
but have the ability to exercise significant influence over the operating and
financial policies, are accounted for under the equity method.
A.T.
Massey and substantially all of our indirect operating subsidiaries, each such
subsidiary being indirectly 100% owned by us, fully and unconditionally, jointly
and severally, guarantee our obligations under the 6.625% senior notes due 2010
(“6.625% Notes”), the 6.875% senior notes due 2013 (“6.875% Notes”), the 3.25%
convertible senior notes due 2015 (“3.25% Notes”) and the 2.25% convertible
senior notes due 2024 (“2.25% Notes”). The subsidiaries not providing
a guarantee of the 6.625% Notes, the 6.875% Notes, the 3.25% Notes and the 2.25%
Notes are minor (as defined under Securities and Exchange Commission (“SEC”)
Rule 3-10(h)(6) of Regulation S-X). See Note 5 to the Notes to Condensed
Consolidated Financial Statements for a more complete discussion of
debt.
In May
2009, the Financial Accounting Standards Board (“FASB”) issued accounting
guidance, effective for financial statements issued for interim and annual
periods ending after June 15, 2009, which requires us to disclose the date
through which we have evaluated subsequent events and whether the date
corresponds with the release of our financial statements. We have
evaluated subsequent events through October 28, 2009, the date the
financial statements were issued.
Codification
In September 2009, the FASB issued new accounting guidance, effective for
financial statements issued for interim and annual periods ending after
September 15, 2009, which identifies the FASB Accounting Standards
Codification (“Codification”) as the authoritative source of GAAP in the United
States. Rules and interpretive releases of the SEC under federal securities laws
are also sources of authoritative GAAP for SEC registrants. Codification is not intended to change GAAP. The adoption of
this new accounting guidance had no impact on our financial position or results
of operations.
6
Fair
Value Measurements
We
adopted new accounting guidance on January 1, 2008 and 2009, for financial and
non-financial assets and liabilities, respectively, that requires their
categorization based upon three levels of judgment associated with the inputs
used to measure their fair value. Neither adoption had a material impact on our
financial position or results of operations. See Note 12 to the Notes to
Condensed Consolidated Financial Statements for more information.
Derivative
Instruments
Effective
January 1, 2009, we adopted new accounting guidance related to disclosures about
derivative instruments, which was issued to require disclosures providing an
enhanced understanding of how and why derivative instruments are used, how they
are accounted for and their effect on an entity’s financial condition,
performance and cash flows. See Note 11 to the Notes to Condensed Consolidated
Financial Statements for more information. Our coal sales and coal
purchase forward contracts’ derivative positions are offset on a
counterparty-by-counterparty basis for derivative instruments executed with the
same counterparty under a master netting arrangement.
Convertible
Debt Securities
On
January 1, 2009, new accounting guidance became effective relating to our 3.25%
Notes. The guidance applies to all convertible debt instruments that have a
‘‘net settlement feature,’’ which means that such convertible debt instruments,
by their terms, may be settled either wholly or partially in cash upon
conversion. Issuers of convertible debt instruments that may be settled wholly
or partially in cash upon conversion are required to separately account for the
liability and equity components in a manner reflective of the issuers’
nonconvertible debt borrowing rate. The issuer must determine the estimated fair
value of a similar debt instrument as of the date of the issuance without the
conversion feature but inclusive of any other embedded features and assign that
value to the debt component of the instrument, which results in a discount being
recorded. The debt discount is subsequently accreted through interest
expense to its par value over its expected life using the market rate at the
date of issuance. The residual value between the initial proceeds and the
value allocated to the debt is reflected in equity as additional paid in
capital. Upon adoption on January 1, 2009, the provisions were retroactively
applied, as required.
7
The
adoption impacted the historical accounting for our 3.25% Notes which resulted
in the adjustment of our Condensed Consolidated Statements of Income for the
three and nine months ended September 30, 2008 and our Condensed
Consolidated Balance Sheet as of December 31, 2008, as noted in the following
tables. The reconciliation of Net income to Cash provided by operating
activites for the nine months ended September 30, 2008 has been adjusted within
our Condensed Consolidated Statement of Cash Flows for the retroactive
application of this adoption.
Three
months ended September 30,
|
Nine
months ended September 30,
|
|||||||||||||||||
2008
|
2008
|
2008
|
2008
|
|||||||||||||||
As
Originally
|
As
Originally
|
|||||||||||||||||
Condensed
Consolidated Income Statement
|
Presented
|
As
Adjusted
|
Presented
|
As
Adjusted
|
||||||||||||||
(In
Thousands, Except Per Share Amounts)
|
||||||||||||||||||
Interest
expense
|
$ | 26,913 | $ | 29,843 | $ | 68,676 | $ | 71,606 | ||||||||||
Income
(loss) before taxes
|
64,782 | 61,852 | (7,773 | ) | (10,703 | ) | ||||||||||||
Income
tax (expense) benefit
|
(10,756 | ) | (10,294 | ) | 10,395 | 10,857 | ||||||||||||
Net
income
|
54,026 | 51,558 | 2,622 | 154 | ||||||||||||||
Net
income per share:
|
||||||||||||||||||
Basic
|
$ | 0.65 | $ | 0.62 | $ | 0.03 | $ | 0.00 | ||||||||||
Diluted
|
$ | 0.64 | $ | 0.61 | $ | 0.03 | $ | 0.00 | ||||||||||
December
31,
|
December
31,
|
|||||||||||||||||
2008 | 2008 | |||||||||||||||||
As
Originally
|
||||||||||||||||||
Condensed
Consolidated Balance Sheet
|
Presented
|
As
Adjusted
|
||||||||||||||||
(In
Thousands)
|
||||||||||||||||||
Other
Noncurrent Assets
|
$ | 142,644 | $ | 139,186 | ||||||||||||||
Total
assets
|
3,675,836 | 3,672,378 | ||||||||||||||||
Long-term
debt
|
1,463,643 | 1,310,181 | ||||||||||||||||
Deferred
taxes
|
117,268 | 177,294 | ||||||||||||||||
Total
noncurrent liabilities
|
2,135,049 | 2,041,613 | ||||||||||||||||
Total
liabilities
|
2,639,202 | 2,545,766 | ||||||||||||||||
Additional
capital
|
444,122 | 542,519 | ||||||||||||||||
Retained
earnings
|
640,496 | 632,077 | ||||||||||||||||
Total
shareholders’ equity
|
1,036,634 | 1,126,612 | ||||||||||||||||
Total
liabilities and shareholders’ equity
|
3,675,836 | 3,672,378 |
See Note
5 to the Notes to Condensed Consolidated Financial Statements for more
information.
(2) Inventories
Inventories
consisted of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
(In
Thousands)
|
||||||||
Saleable
coal
|
$ | 141,073 | $ | 144,834 | ||||
Raw
coal
|
31,092 | 16,802 | ||||||
Coal
inventory
|
172,165 | 161,636 | ||||||
Supplies
inventory
|
57,664 | 71,532 | ||||||
Total
inventory
|
$ | 229,829 | $ | 233,168 |
Saleable coal represents coal ready for
sale, including inventories designated for customer facilities under consignment
arrangements of $29.9 million and $50.7 million at September 30, 2009 and
December 31, 2008, respectively. Raw coal represents coal that generally
requires further processing prior to shipment to the customer.
8
(3) Other
Current Assets
Other
current assets are comprised of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
(In
Thousands)
|
||||||||
Longwall
panel costs
|
$ | 13,003 | $ | 12,290 | ||||
Deposits
|
134,214 | 59,648 | ||||||
Other
|
46,527 | 44,123 | ||||||
Total
other current assets
|
$ | 193,744 | $ | 116,061 |
Deposits
consist primarily of funds placed in restricted accounts with financial
institutions to collateralize letters of credit that support workers’
compensation requirements, insurance and other obligations. As of September 30,
2009 and December 31, 2008, Deposits includes $46.0 million of funds pledged as
collateral to support $45.0 million of outstanding letters of credit. In
addition, Deposits at September 30, 2009 and December 31, 2008, includes $13.4
and $13.0 million of United States Treasury securities supporting various
regulatory obligations, respectively. During the third quarter of
2009, we posted $72.0 million of cash as collateral for an appeal bond in the
Harman litigation (see Note 13 to the Notes to Condensed Consolidated Financial
Statements for more information).
During
the third quarter of 2009, we committed to the divestiture of certain mining
equipment assets which are not part of our short-term mining plan. At
September 30, 2009, the carrying amount of assets held for sale totaled
$20.1 million and is included in Other current assets.
(4) Property,
Plant and Equipment
Property,
plant and equipment is comprised of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
(In
Thousands)
|
||||||||
Property,
plant and equipment, at cost
|
$ | 4,574,826 | $ | 4,373,325 | ||||
Accumulated
depreciation, depletion and amortization
|
(2,235,203 | ) | (2,075,629 | ) | ||||
Net
property, plant and equipment
|
$ | 2,339,623 | $ | 2,297,696 |
Property,
plant and equipment includes gross assets under capital leases of $12.9 and
$17.3 million at September 30, 2009 and December 31, 2008,
respectively.
During
the third quarter of 2009, we acquired approximately 23 million tons of coal
reserves, permitted deep and surface mines, a permitted preparation plant and
associated refuse area, infrastructure and some mobile and mining equipment from
a third party for a cash payment of $5.2 million and the assumption of $14.3
million of asset retirement obligations.
During
the third quarter of 2009, we exchanged coal reserves and other assets with a
third party, recognizing a pre-tax gain in Other revenue of $24.9 million. The
gain was calculated based on the fair value of our assets that were surrendered
in the exchange. We also assumed asset retirement obligations and sales
contract liabilities of $5.7 million and $12.5 million, respectively. The
acquired coal reserves and other assets were recorded in Property, plant and
equipment at the sum of the fair value of the assets surrendered and liabilities
assumed.
During
the first quarter of 2009, we sold our interest in certain coal reserves to a
third party, recognizing a pre-tax gain of $7.1 million in Other
revenue.
During
the first, second and third quarters of 2008, we exchanged coal reserves and
other assets with various third parties, recognizing pre-tax gains in Other
Revenue of $13.6 million, $15.3 million, and $3.6 million, respectively. The
acquired coal reserves and other assets were recorded in Property, plant and
equipment at the fair value of the reserves and other assets
surrendered.
9
(5) Debt
Debt is
comprised of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
As
Adjusted
|
||||||||
(In
Thousands)
|
||||||||
6.875%
senior notes due 2013, net of discount
|
||||||||
of
$3,449 and $3,959, respectively
|
$ | 756,551 | $ | 756,041 | ||||
3.25%
convertible senior notes due 2015, net of discount
|
||||||||
of
$139,564 and $153,462, respectively
|
531,436 | 517,538 | ||||||
6.625%
senior notes due 2010
|
21,949 | 21,949 | ||||||
2.25%
convertible senior notes due 2024
|
9,647 | 9,647 | ||||||
4.75%
convertible senior notes due 2023
|
- | 70 | ||||||
Capital
lease obligations
|
4,736 | 6,912 | ||||||
Total
debt
|
1,324,319 | 1,312,157 | ||||||
Amounts
due within one year
|
(1,593 | ) | (1,976 | ) | ||||
Total
long-term debt
|
$ | 1,322,726 | $ | 1,310,181 |
The
weighted average effective interest rate of the outstanding borrowings was 7.3%
both at September 30, 2009 and December 31, 2008.
Convertible
Debt Securities
On
January 1, 2009, new accounting guidance became effective relating to our 3.25%
Notes. Upon adoption on the effective date, the new accounting guidance was
retroactively applied, as required. This resulted in $4.8 million and $13.9
million of additional non-cash interest expense recorded for the three and nine
months ended September 30, 2009, respectively, and $2.9 million of additional
non-cash interest expense recorded for both the three and nine months ended
September 30, 2008. The impact to Earnings per share was a decrease of $0.03 and
$0.10 for the three and nine months ended September 30, 2009, respectively, and
a decrease of $0.03 for both the three and nine months ended September 30, 2008.
We separately account for the liability and equity components in a manner
reflective of our nonconvertible debt borrowing rate, which was determined to be
7.75% at the date of issuance of our 3.25% Notes. The discount associated with
the 3.25% Notes will be amortized via the effective-interest method increasing
the reported liability until the notes are carried at par value on their
maturity date.
4.75%
Notes
During
May 2009, we redeemed at par the remaining $70,000 of the 4.75% convertible
senior notes due 2023.
(6)
|
Pension
Expense
|
Net
periodic pension expense for both our qualified defined benefit pension plan and
nonqualified supplemental benefit pension plan is comprised of the following
components:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Service
cost
|
$ | 2,677 | $ | 2,182 | $ | 8,031 | $ | 6,510 | ||||||||
Interest
cost
|
4,233 | 3,855 | 12,698 | 11,911 | ||||||||||||
Expected
return on plan assets
|
(4,090 | ) | (5,713 | ) | (12,270 | ) | (17,139 | ) | ||||||||
Recognized
loss (gain)
|
4,333 | (54 | ) | 12,999 | 578 | |||||||||||
Amortization
of prior service cost
|
70 | 11 | 210 | 31 | ||||||||||||
Net
periodic pension expense
|
$ | 7,223 | $ | 281 | $ | 21,668 | $ | 1,891 |
10
We paid
benefits to participants of the nonqualified supplemental benefit pension plan
of $0.05 million for both the nine month periods ended September 30, 2009 and
2008. We have contributed a total of $5.0 million to the qualified defined
benefit pension plan in 2009. No additional contributions are required during
2009.
The
increase in our 2009 pension cost related to our qualified defined benefit
pension plan was due to investment losses on our pension assets incurred during
2008.
(7) Other
Noncurrent Liabilities
Other noncurrent liabilities is
comprised of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
(In
Thousands)
|
||||||||
Reclamation
|
$ | 184,427 | $ | 154,823 | ||||
Workers'
compensation and black lung
|
95,360 | 92,982 | ||||||
Other
postretirement benefits
|
166,973 | 161,527 | ||||||
Other
|
86,413 | 81,502 | ||||||
Total
other noncurrent liabilities
|
$ | 533,173 | $ | 490,834 |
(8) Black
Lung and Workers’ Compensation Expense
Expenses
for black lung benefits and workers’ compensation related benefits include the
following components:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Self-insured
black lung benefits:
|
||||||||||||||||
Service
cost
|
$ | 922 | $ | 547 | $ | 2,767 | $ | 1,640 | ||||||||
Interest
cost
|
718 | 848 | 2,154 | 2,543 | ||||||||||||
Amortization
of actuarial gain
|
(1,144 | ) | (872 | ) | (3,432 | ) | (2,617 | ) | ||||||||
Subtotal
black lung benefits expense
|
496 | 523 | 1,489 | 1,566 | ||||||||||||
Other
workers' compensation benefits
|
7,536 | 7,812 | 22,601 | 24,360 | ||||||||||||
Total
black lung and workers'
|
||||||||||||||||
compensation
benefits expense
|
$ | 8,032 | $ | 8,335 | $ | 24,090 | $ | 25,926 |
Payments
for benefits, premiums and other costs related to black lung and workers’
compensation liabilities were $6.2 million and $5.5 million for the three months
ended September 30, 2009 and 2008, respectively, and were $23.8 million and
$18.8 million for the nine months ended September 30, 2009 and 2008,
respectively.
(9) Other
Postretirement Benefits Expense
Net
periodic postretirement benefit cost includes the following
components:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Service
cost
|
$ | 978 | $ | 801 | $ | 2,935 | $ | 2,403 | ||||||||
Interest
cost
|
2,504 | 2,211 | 7,513 | 6,634 | ||||||||||||
Recognized
loss
|
576 | 203 | 1,728 | 610 | ||||||||||||
Amortization
of prior service credit
|
(188 | ) | (188 | ) | (564 | ) | (563 | ) | ||||||||
Net
periodic postretirement benefit cost
|
$ | 3,870 | $ | 3,027 | $ | 11,612 | $ | 9,084 |
11
Payments
for benefits related to postretirement benefit cost were $2.3 million and $1.5
million for the three months ended September 30, 2009 and 2008, respectively,
and were $5.6 million and $4.6 million for the nine months ended September 30,
2009 and 2008, respectively.
(10) Earnings
Per Share
The
number of shares of our common stock, $0.625 par value per share (“Common
Stock”), used to calculate basic earnings per share for the three and nine
months ended September 30, 2009 and 2008 is based on the weighted average of
outstanding shares of Common Stock during the respective periods. The number of
shares of Common Stock used to calculate diluted earnings per share is based on
the number of shares of Common Stock used to calculate basic earnings per share
plus the dilutive effect of stock options and other stock-based instruments held
by our employees and directors during each period and debt securities currently
convertible into shares of Common Stock during each period. The effect of
dilutive securities issuances in the amount of 1.2 million and 2.8 million
shares of Common Stock for the three and nine months ended September 30, 2009,
respectively, and 0.01 million shares of Common Stock for both the three and
nine months ended September 30, 2008, were excluded from the calculation of
diluted income per share of Common Stock, as such inclusion would result in
antidilution.
The
computations for basic and diluted income per share are based on the following
per share information:
Three
Months Ended
|
Nine
Months Ended
|
||||||||||||||||
September
30,
|
September
30,
|
||||||||||||||||
2009
|
2008
|
2009
|
2008
|
||||||||||||||
As
Adjusted
|
As
Adjusted
|
||||||||||||||||
(In Thousands, Except Per Share Amounts) | |||||||||||||||||
Numerator:
|
|||||||||||||||||
Net
income - numerator for basic
|
$ | 16,458 | $ | 51,558 | $ | 80,076 | $ | 154 | |||||||||
Effect
of convertible notes
|
44 | 45 | 130 | 143 | |||||||||||||
Adjusted
net income - numerator
|
|||||||||||||||||
for
diluted
|
$ | 16,502 | $ | 51,603 | $ | 80,206 | $ | 297 | |||||||||
Denominator:
|
|||||||||||||||||
Weighted
average shares - denominator
|
|||||||||||||||||
for
basic
|
84,930 | 82,623 | 84,887 | 80,851 | |||||||||||||
Effect
of stock options/restricted stock
|
444 | 1,045 | 195 | 907 | |||||||||||||
Effect
of convertible notes
|
288 | 291 | 289 | 312 | |||||||||||||
Adjusted
weighted average
|
|||||||||||||||||
shares
- denominator for diluted
|
85,662 | 83,959 | 85,371 | 82,070 | |||||||||||||
Net
income per share:
|
|||||||||||||||||
Basic
|
$ | 0.19 | $ | 0.62 | $ | 0.94 | $ | 0.00 | |||||||||
Diluted
|
$ | 0.19 | $ | 0.61 | $ | 0.94 | $ | 0.00 |
The 2.25%
Notes are convertible by holders into shares of Common Stock during certain
periods under certain circumstances. The 2.25% Notes were not eligible for
conversion at September 30, 2009. If all of the 2.25% Notes
outstanding at September 30, 2009 had been eligible for conversion and were
converted, we would have issued 287,113 shares of Common Stock.
The 3.25%
Notes are convertible under certain circumstances and during certain periods
into (i) cash, up to the aggregate principal amount of the 3.25% Notes
subject to conversion and (ii) cash, Common Stock or a combination thereof,
at our election in respect to the remainder (if any) of our conversion
obligation. As of September 30, 2009, the 3.25% Notes were not eligible for
conversion.
12
(11) Derivative
Instruments
We
evaluate each of our coal sales and coal purchase forward contracts to determine
if they qualify for the normal purchase normal sale (“NPNS”) exception
prescribed by current accounting guidance. The majority of our forward contracts
do qualify for the NPNS exception based on management's intent and ability to
physically deliver or take physical delivery of the coal and therefore are not
reflected in the Condensed Consolidated Balance Sheets and Condensed
Consolidated Statements of Income. For those contracts that do not qualify for
the NPNS exception, the contracts are required to be accounted for as derivative
instruments and must be recognized as assets or liabilities and measured at fair
value. We use purchase coal contracts to supplement our produced and processed
coal in order to provide coal to meet customer requirements under sales
contracts. Those contracts that have been identified as derivatives have not
been designated as cash flow or fair value hedges and, accordingly, the net
change in fair value is recorded in current period earnings. As of
September 30, 2009, there were approximately 1.8 million and 2.4 million tons
outstanding under these coal purchase and coal sales contracts, respectively. We
have recorded a net loss of $4.8 million ($2.5 million of unrealized losses due
to fair value measurement adjustments and $2.3 million of realized losses due to
settlements on existing contracts) for the three months ended September 30,
2009, and a net gain of $4.5 million ($22.6 million of unrealized gains due to
fair value measurement adjustments and $18.1 million of realized losses due to
settlements on existing contracts) for the nine months ended September 30, 2009,
related to coal sales and purchase contracts that qualify as derivatives in the
Condensed Consolidated Statements of Income under the caption Loss (gain) on
derivative instruments. An asset of $0.1 million is included in Other current
assets in the Condensed Consolidated Balance Sheets as of September 30, 2009.
The fair values of our purchases and sales derivative contracts have been
aggregated in Other current assets.
We are
exposed to certain risks related to coal price volatility. The forward purchases
and sales contracts we enter into and deem derivatives allow us to mitigate a
portion of the underlying risk associated with coal price
volatility.
(12) Fair
Value
Financial
and non-financial assets and liabilities that are required to be measured at
fair value must be categorized based upon the levels of judgment associated with
the inputs used to measure their fair value. Hierarchical levels –
directly related to the amount of subjectivity associated with the inputs used
to determine the fair value of financial assets and liabilities – are as
follows:
|
•
|
Level
1 – Inputs are unadjusted, quoted prices in active markets for identical
assets or liabilities at the measurement
date.
|
|
•
|
Level
2 – Inputs (other than quoted prices included in Level 1) are either
directly or indirectly observable for the assets or liability through
correlation with market data at the measurement date and for the duration
of the instrument’s anticipated
life.
|
|
•
|
Level
3 – Inputs reflect management’s best estimate of what market participants
would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the
valuation technique and the risk inherent in the inputs to the
model.
|
Each
major category of financial assets and liabilities measured at fair value on a
recurring basis are categorized in the tables below based upon the lowest level
of significant input to the valuations.
September
30, 2009
|
||||||||||||||||
(In
Thousands)
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Fixed
income securities
|
$ | 13,408 | $ | - | $ | - | $ | 13,408 | ||||||||
Money
market funds
|
723,991 | - | - | 723,991 | ||||||||||||
Short-term
investment
|
- | - | 15,121 | 15,121 | ||||||||||||
Derivative
instruments
|
- | 46 | - | 46 | ||||||||||||
Total
securities
|
$ | 737,399 | $ | 46 | $ | 15,121 | $ | 752,565 |
13
Fixed
income securities and money market funds
All
investments in money market funds are cash equivalents or deposits pledged as
collateral and are invested in AAA prime money market funds and Treasury-backed
funds. Included in the money market funds are $46.0 million of funds pledged as
collateral to support $45.1 million of outstanding letters of credit and $72.0
million of cash held as collateral for an appeal bond in the Harman litigation.
All fixed income securities are deposits, consisting of obligations of the U.S.
Treasury, supporting various regulatory obligations. See Note 3 to
the Notes to Condensed Consolidated Financial Statements for more information on
deposits.
Short-Term
Investment
Short-term
investment is comprised of an investment in The Reserve Primary Fund (“Primary
Fund”), a money market fund that has suspended redemptions and is being
liquidated. We have determined that our investment in the Primary Fund no longer
meets the definition of a security, within the scope of current accounting
guidance, since the equity investment no longer has a readily determinable fair
value. Therefore, the investment has been classified as a short-term investment,
subject to the cost method of accounting, on our Condensed Consolidated Balance
Sheet. This classification as a short-term investment is based on our assessment
of each of the individual securities that make up the underlying portfolio
holdings in the Primary Fund, which primarily consisted of commercial paper and
discount notes having maturity dates within the next 12 months, and the stated
notifications from the Primary Fund that they expect to liquidate substantially
all of their holdings and make distributions within a year.
Assets
Measured at Fair Value on a Recurring Basis Using Significant Unobservable
Inputs (Level 3):
Short-term
|
||||
(In
Thousands)
|
Investments
|
|||
Balance
at December 31, 2008
|
$ | 39,383 | ||
Transfers
out of Level 3, net
|
(24,262 | ) | ||
Change
in fair value included in earnings
|
- | |||
Balance
at September 30, 2009
|
$ | 15,121 | ||
Losses
included in earnings attributable to the change in
unrealized
|
||||
losses
relating to assets still held at September 30, 2009
|
$ | - |
We
received distributions from the Primary Fund in the amount of $24.3 million
during the first nine months of 2009, leaving an investment balance of $15.1
million, net of an estimated $6.5 million loss recorded in 2008. While we expect
to receive substantially all of our remaining $15.1 million in the Primary Fund
during 2009, we cannot predict during 2009 when this will occur or the actual
amount we will eventually receive. Subsequent to September 30, 2009, we received
an additional distribution from the Primary Fund in the amount of $4.3
million.
Derivative
Instruments
Certain
of our coal sales and coal purchase forward contracts are accounted for as
derivative instruments and are required to be recognized as assets or
liabilities and measured at fair value. To establish fair values for these
contracts, we use bid/ask price quotations obtained from independent third-party
brokers. We could experience difficulty in valuing our derivative
instruments if the number of third-party brokers should decrease or market
liquidity is reduced. See Note 11 to the Notes to Condensed Consolidated
Financial Statements for more information.
14
Fair
Value Option
The following methods and
assumptions were used to estimate the fair value of those financial instruments
that are not required to be carried at fair value within our Condensed
Consolidated Balance Sheets:
Short-term debt: The carrying
amount reported in the Condensed Consolidated Balance Sheets for short-term debt
approximates its fair value due to the short-term maturity of these
instruments.
Long-term debt: The fair values
of long-term debt are estimated using the most recent market prices quoted on or
before September 30, 2009.
The carrying amounts and fair values of these
financial instruments are presented in the table below. The carrying value of
the 3.25% Notes reflected in Long-term debt in the table below reflects the full
face amount of $671 million, which has been adjusted in the Condensed
Consolidated Balance Sheets for the adoption of new accounting guidance, which
became effective January 1, 2009 (see Note 5 to the Notes to Condensed
Consolidated Financial Statements for more information).
September
30, 2009
|
December
31, 2008
|
|||||||||||||||||
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|
||||||||||||||
(In
Thousands)
|
||||||||||||||||||
Short-term
debt
|
$ | 1,593 | $ | 1,593 | $ | 1,976 | $ | 1,976 | ||||||||||
Long-term
debt
|
$ | 1,462,596 | $ | 1,316,317 | $ | 1,462,666 | $ | 931,011 |
(13) Contingencies
|
Harman
|
In
December 1997, A.T. Massey’s then subsidiary, Wellmore Coal Corporation
(“Wellmore”), declared force majeure under its coal supply agreement with Harman
Mining Corporation (“Harman”) and reduced the amount of coal to be purchased
from Harman. On October 29, 1998, Harman and its sole shareholder sued A.T.
Massey and five of its other subsidiaries (the “Massey Defendants”) in the
Circuit Court of Boone County, West Virginia, alleging that the Massey
Defendants tortiously interfered with Wellmore’s agreement with Harman, causing
Harman to go out of business. On August 1, 2002, the jury awarded the plaintiffs
$50 million in compensatory and punitive damages. On October 24, 2006, the
Massey Defendants timely filed their Petition for Appeal to the Supreme Court of
Appeals of West Virginia (“WV Supreme Court”). On November 21, 2007,
the WV Supreme Court issued a 3-2 majority opinion reversing the judgment
against the Massey Defendants and remanding the case to the Circuit Court of
Boone County with directions to enter an order dismissing the case, with
prejudice, in its entirety. The Harman plaintiffs filed motions
asking the WV Supreme Court to conduct a rehearing in the case. On January 24,
2008, the WV Supreme Court decided to rehear the case, which was re-argued on
March 12, 2008. On April 3, 2008, the WV Supreme Court again reversed the
judgment against the Massey Defendants and remanded the case with direction to
enter an order dismissing the case, with prejudice, in its entirety. In July
2008, the Harman plaintiffs petitioned the United States Supreme Court (the
“U.S. Supreme Court”) to review the WV Supreme Court’s dismissal of their
claims.
In
December 2008, the U.S. Supreme Court agreed to review the case. The
U.S. Supreme Court granted review based on the question of whether a justice of
the WV Supreme Court should have recused himself from the appeal. The U.S.
Supreme Court found that the justice should have recused himself and ruled on
June 8, 2009 that the matter should be reheard by the West Virginia Supreme
Court. The West Virginia Supreme Court heard oral arguments on the
matter on September 8, 2009, but has not yet rendered a decision. We
were required to post $72 million of cash as collateral for an appeal bond
prior to the rehearing on September 8, 2009. We believe the maximum loss
exposure related to this matter is approximately $86 million as of September 30,
2009, including post-judgment interest and other costs. We believe a loss is not
probable and therefore have not recorded an accrual. It is reasonably
possible that our judgments regarding these matters could change in the near
term, resulting in the recording of material losses that would affect our
operating results and financial position.
15
|
West
Virginia Flooding
|
|
Since
July 2001, we and nine of our subsidiaries have been sued in 17 consolidated
civil actions filed in the Circuit Courts of Boone, Fayette, Kanawha, McDowell,
Mercer, Raleigh and Wyoming Counties, West Virginia, for alleged property
damages and personal injuries arising out of flooding on or about July 8, 2001.
Along with 32 other consolidated cases not involving us or our subsidiaries,
these cases cover approximately 1,800 plaintiffs seeking unquantified
compensatory and punitive damages against approximately 100 defendants. The WV
Supreme Court transferred all 49 cases (the “Referred Cases”) to the Circuit
Court of Raleigh County, West Virginia, to be handled by a mass litigation
panel, which consists of six circuit court judges who have extensive experience
with mass litigation. We believe we have insurance coverage applicable to these
items.
Since
August 2004, five of our subsidiaries have been sued in six civil actions filed
in the Circuit Courts of Boone, McDowell, Mingo, Raleigh, Summers and Wyoming
Counties, West Virginia, for alleged property damages and personal injuries
arising out of flooding on or about May 2, 2002. These complaints cover
approximately 350 plaintiffs seeking unquantified compensatory and punitive
damages from approximately 35 defendants. On February 2, 2009, the
Circuit Court of Raleigh County dismissed one of these cases without prejudice
for failure to prosecute. We anticipate that plaintiffs will re-file
this case within one year of this dismissal as permitted by West Virginia
law.
Since May
2006, we and twelve of our subsidiaries have been sued in three civil actions
filed in the Circuit Courts of Logan and Mingo Counties, West Virginia, for
alleged property damages and personal injuries arising out of flooding between
May 30 and June 4, 2004. Four of our subsidiaries have been dismissed from one
of the Logan County cases. These complaints cover approximately 425 plaintiffs
seeking unquantified compensatory and punitive damages from approximately 52
defendants.
We
believe these matters will be resolved without a material adverse impact on our
cash flows, results of operations or financial condition.
|
West
Virginia Trucking
|
Since
January 2003, an advocacy group and residents in Boone, Kanawha, Mingo and
Raleigh Counties, West Virginia, filed 17 suits in the Circuit Courts of Kanawha
and Mingo Counties, West Virginia, against twelve of our subsidiaries.
Plaintiffs alleged that defendants illegally transported coal in overloaded
trucks, causing damage to state roads, thereby interfering with plaintiffs’ use
and enjoyment of their properties and their right to use the public roads.
Plaintiffs seek injunctive relief and compensatory and punitive damages. The WV
Supreme Court referred the consolidated lawsuits, and similar lawsuits against
other coal and transportation companies not involving our subsidiaries, to the
Circuit Court of Lincoln County, West Virginia, to be handled by a mass
litigation panel judge. Plaintiffs filed motions requesting class certification.
On June 7, 2007, plaintiffs voluntarily dismissed their public nuisance claims
seeking monetary damages for road and bridge repairs. Defendants filed a motion
requesting that the mass litigation panel judge recommend to the WV Supreme
Court that the cases be sent back to the circuit courts of origin for
resolution. That motion was verbally denied as to those cases in which our
subsidiaries are defendants, and a class certification hearing was scheduled for
October 21, 2009. Following a motion by defendants, plaintiffs agreed
to an order limiting any damages for nuisance to two years prior to the filing
of any suit. A motion to dismiss any remaining public nuisance claims was
resisted by plaintiffs and argued at hearings on December 14, 2007 and June 25,
2008. No date has been set for trial. We believe we have insurance coverage
applicable to these items and that they will be resolved without a material
adverse impact on our cash flows, results of operations or financial
condition.
|
Well
Water Suits
|
Since
September 2004, approximately 738 plaintiffs have filed approximately 400 suits
against us and our subsidiary, Rawl Sales & Processing Co., in the Circuit
Court of Mingo County, West Virginia (“Mingo Court”), for alleged property
damage and personal injuries arising out of slurry injection and impoundment
practices allegedly contaminating plaintiffs’ water wells. Plaintiffs seek
injunctive relief and compensatory damages in excess of $170 million and
unquantified punitive damages. Specifically, plaintiffs are claiming that
defendants’ activities during the period of 1978 through 1987 rendered their
property valueless and request monetary damages
16
We do not
believe there was any contamination caused by our activities or that plaintiffs
suffered any damage and, therefore, we do not believe we have a probable loss
related to this matter. We plan to vigorously contest these claims. We believe
that we have insurance coverage applicable to these matters and have initiated
litigation against our insurers to establish that coverage. At this time, we
believe that the litigation by the plaintiffs will be resolved without a
material adverse impact on our cash flows, results of operations or financial
condition.
|
Surface
Mining Fills
|
Since
September 2005, three environmental groups sued the United States Army Corps of
Engineers (“Corps”) in the United States District Court for the Southern
District of West Virginia (the “District Court”), asserting the Corps unlawfully
issued permits to four of our surface mines to construct mining fills. The suit
alleges the Corps failed to comply with the requirements of both Section 404 of
the Clean Water Act and the National Environmental Policy Act, including
preparing environmental impact statements for individual permits. We intervened
in the suit to protect our interests. On March 23, 2007, the District Court
rescinded four of our subsidiaries’ permits, resulting in the temporary
suspension of mining at these surface mines. We appealed that ruling to the
United States Court of Appeals for the Fourth Circuit (the “Fourth Circuit
Court”). On April 17, 2007, the District Court partially stayed its ruling,
permitting mining to resume in certain fills that were already under
construction. On June 14, 2007, the District Court issued an additional ruling,
finding the Corps improperly approved placement of sediment ponds in streams
below fills on the four permits in question. The District Court
subsequently modified its ruling to allow these ponds to remain in place, as the
ponds and fills have already been constructed. The District Court’s
ruling could impact the issuance of permits for the placement of sediment ponds
for future operations. If the permits for the fills or sediment ponds are
ultimately held to be unlawfully issued, production could be affected at these
surface mines, and the process of obtaining new Corps permits for all surface
mines could become more difficult. We appealed both rulings to the Fourth
Circuit Court. On February 13, 2009, the Fourth Circuit Court
reversed the prior rulings of the District Court and remanded the matter for
further proceedings. On March 30, 2009, the plaintiffs requested that the Fourth
Circuit Court reconsider the case. The request was denied on May 20,
2009. On August 26, 2009, the plaintiffs filed their request with the U.S.
Supreme Court to review the Fourth Circuit Court’s decision. Our subsidiaries’
response is due October 28, 2009. The U.S. Supreme Court then will
decide whether to accept the case for review.
|
Customer
Disputes
|
We have
customers who claim they did not receive, or did not timely receive, all of the
coal required to be shipped to them during 2008 (“unshipped tons”). In such
cases, it is typical for a customer and coal producer to agree upon a schedule
for shipping unshipped tons in subsequent years. A few of our
customers, however, have filed claims or have notified us of potential claims
for cover damages, which damages are equal to the difference between the
contract price of the coal that was not delivered and the market price of
replacement coal or comparable quality coal. We have resolved certain of these
claims in 2009, while discussions with other customers remain
ongoing.
17
We
believe we have strong defenses to these claims or potential claims for cover
damages. In many cases, there was untimely or insufficient
delivery of railcars by the rail carrier or the customer. In other
cases, factors beyond our control caused production or shipment
problems. Additionally, we believe that certain
customers previously agreed to accept unshipped tons in subsequent
years. We believe that all of these factors, and other factors,
provide defenses to claims or potential claims for unshipped tons.
Separately,
we are currently in talks with a few other customers regarding disagreements
over other contract matters. Specifically, we have disputes with two
customers regarding whether or not binding contracts for the sale of coal were
reached. One of these customers has improperly terminated a signed,
higher-priced contract and argues that it was only required to purchase coal
under a purported agreement reached by email. The other customer
argues that it reached agreement with us in the absence of a signed agreement
and has brought litigation against us for not honoring an alleged unsigned
agreement. We do not believe that we have failed to honor any binding
agreement with these customers.
We
believe that we have strong defenses to these claims and potential claims and
further feel that many or all of these claims may be resolved without
litigation. We have recorded an accrual for our best estimate of probable losses
related to these matters. While we believe that all of these matters discussed
above will be resolved without a material adverse impact on our cash flows,
results of operations or financial condition, it is reasonably possible that our
judgments regarding some or all of these matters could change in the near term.
We believe the aggregate exposure related to these claims in excess of our
accrual is up to $76 million of charges that would affect our future operating
results and financial position.
Spartan
Unfair Labor Practice Matter & Related Age Discrimination Class
Action
In 2005,
the United Mine Workers of America (“UMWA”) filed an unfair labor practice
charge with the National Labor Relations Board (“NLRB”) alleging that one of our
subsidiaries, Spartan Mining Company (“Spartan”), discriminated on the basis of
anti-union animus in its employment offers. The NLRB issued a
complaint and an NLRB Administrative Law Judge (“ALJ”) issued a recommended
decision making detailed findings that Spartan committed a number of unfair
labor practice violations and awarding, among other relief, back pay damages to
union discriminatees. On September 30, 2009, the NLRB upheld the
ALJ’s recommended decision. Spartan is appealing the NLRB’s decision to the
United States Court of Appeals for the Fourth Circuit. We have no insurance
coverage applicable to this unfair labor practice matter; however, its
resolution is not expected to have a material impact on our cash flows, results
of operations or financial condition.
On
November 1, 2006, a class action age discrimination civil case was filed in West
Virginia’s Fayette County Circuit Court. The suit alleged that
Spartan discriminated against employment applicants on the basis of
age. The class includes approximately 229 individuals, 82 of whom are
also union discriminatees at issue in the ALJ’s decision. The plaintiffs made
claims for back pay, front pay, punitive damages, and other compensatory
damages, plus attorney fees. We have insurance coverage applicable to the class
action and, on July 28, 2009, the parties executed a Class Settlement Agreement,
that establishes a settlement fund from which all class claims and attorney fees
will be paid. The majority of the settlement proceeds are to be paid
by the insurer, with Spartan’s portion of the settlement limited to its
insurance deductible of $1 million dollars plus applicable employer payroll
taxes for back pay allocated to class plaintiffs. The parties
anticipate that a final hearing approving the settlement will be held by
November 1, 2009. Consequently, we expect this matter to conclude
without a material impact on our cash flows, results of operations or financial
condition.
|
Other
Legal Proceedings
|
We are
parties to a number of other legal proceedings, incident to our normal business
activities. These include contract dispute, personal injury, property damage and
employment matters. While we cannot predict the outcome of these proceedings,
based on our current estimates we do not believe that any liability arising from
these matters individually or in the aggregate should have a material adverse
impact upon our consolidated cash flows, results of operations or financial
condition. It is possible, however, that the ultimate liabilities in the future
with respect to these lawsuits and claims, in the aggregate, may be materially
adverse to our cash flows, results of operations or financial
condition.
18
|
Bandmill
Fire
|
On August
27, 2009, a fire destroyed the Bandmill preparation plant at our Logan County
resource group, located near Logan, West Virginia. This incident
significantly impacted the operations at Logan County and, to a lesser extent,
our operations as a whole during the quarter. Efforts to replace
production at the other Company locations to help mitigate the effects of the
fire, including meeting customer commitments, are ongoing. We maintain property
insurance and expect the level of insurance proceeds will cover most, if not
all, of the property losses incurred from the fire and the cost associated with
the reconstruction of the facility.
* * * * *
* * *
19
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis is provided to increase understanding of, and
should be read in conjunction with, the Condensed Consolidated Financial
Statements and accompanying notes included in this Quarterly Report on Form 10-Q
and our Annual Report on Form 10-K for the year ended December 31,
2008.
Forward-Looking
Information
From time
to time, we make certain comments and disclosures in reports, including this
report, or through statements made by our officers that may be forward-looking
in nature. Examples include statements related to our future outlook,
anticipated capital expenditures, projected cash flows and borrowings and
sources of funding. We caution readers that forward-looking statements,
including disclosures that use words such as “target,” “goal,” “objective,”
“believe,” “anticipate,” “expect,” “estimate,” “intend,” “may,” “plan,”
“project,” “will” and similar words or statements are subject to certain risks,
trends and uncertainties that could cause actual cash flows, results of
operations, financial condition, cost reductions, acquisitions, dispositions,
financing transactions, operations, expansion, consolidation and other events to
differ materially from the expectations 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. These assumptions are 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 circumstances and events beyond
our control. We disclaim any intent or obligation to update these
forward-looking statements unless required by securities law, and we caution the
reader not to rely on them unduly.
We have
based any forward-looking statements we have made on our current expectations
and assumptions about future events and circumstances that are subject to risks,
uncertainties and contingencies that could cause results to differ materially
from those discussed in the forward-looking statements, including, but not
limited to:
(i)
|
our
cash flows, results of operation or financial
condition;
|
(ii)
|
the
successful completion of acquisition, disposition or financing
transactions and the effect thereof on our
business;
|
(iii)
|
governmental
policies, laws, regulatory actions and court decisions affecting the coal
industry or our customers’ coal usage;
|
(iv)
|
legal
and administrative proceedings, settlements, investigations and claims and
the availability of insurance coverage related
thereto;
|
(v)
|
inherent
risks of coal mining beyond our control, including weather and geologic
conditions or catastrophic weather-related
damage;
|
(vi)
|
our
production capabilities to meet market expectations and customer
requirements;
|
(vii)
|
our
ability to obtain coal from brokerage sources or contract miners in
accordance with their contracts;
|
(viii)
|
our
ability to obtain and renew permits necessary for our existing and planned
operations in a timely manner;
|
(ix)
|
the
cost and availability of transportation for our produced
coal;
|
(x)
|
our
ability to expand our mining capacity;
|
(xi)
|
our
ability to manage production costs, including labor
costs;
|
(xii)
|
adjustments
made in price, volume or terms to existing coal supply
agreements;
|
(xiii)
|
the
worldwide market demand for coal, electricity and
steel;
|
20
(xiv)
|
environmental
concerns related to coal mining and combustion and the cost and perceived
benefits of alternative sources of energy such as natural gas and nuclear
energy;
|
(xv)
|
competition
among coal and other energy producers, in the United States and
internationally;
|
(xvi)
|
our
ability to timely obtain necessary supplies and
equipment;
|
(xvii)
|
our
reliance upon and relationships with our customers and
suppliers;
|
(xviii)
|
the
creditworthiness of our customers and
suppliers;
|
(xix)
|
our
ability to attract, train and retain a skilled workforce to meet
replacement or expansion needs;
|
(xx)
|
our
assumptions and projections concerning economically recoverable coal
reserve estimates;
|
(xxi)
|
our
failure to enter into anticipated new
contracts;
|
(xxii)
|
future
economic or capital market conditions;
|
(xxiii)
|
foreign
currency fluctuations;
|
(xxiv)
|
the
availability and costs of credit, surety bonds and letters of credit that
we require;
|
(xxv)
|
the
lack of insurance against all potential operating
risks;
|
(xxvi)
|
our
assumptions and projections regarding pension and other post-retirement
benefit liabilities;
|
(xxvii)
|
our
interpretation and application of accounting literature related to mining
specific issues; and
|
(xxviii)
|
the
successful implementation of our strategic plans and objectives for future
operations and expansion or
consolidation.
|
We are
including this cautionary statement in this Quarterly Report on Form 10-Q to
make applicable and take advantage of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by, or on behalf, of us. Any forward-looking statements should be considered in
context with the various disclosures made by us about our businesses in our
public filings with the SEC, including without limitation the risk factors more
specifically described in Part II Item 1A. Risk Factors of this Quarterly Report
on Form 10-Q and in Part I Item 1A. Risk Factors of our Annual Report on Form
10-K for the year ended December 31, 2008.
Available
Information
We file
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, proxy statements and other information with the SEC. Our SEC
filings are available to the public over the Internet at the SEC’s website at
www.sec.gov. You may also read and copy any document we file at the SEC’s public
reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the
SEC at 1-800-SEC-0330 for further information on the public reference room. We
make available, free of charge through our Internet website, www.masseyenergyco.com
(which website is not incorporated by reference into this report), our annual
report, quarterly reports, current reports, proxy statements, section 16 reports
and other information (and any amendments thereto) as soon as practicable after
filing or furnishing the material to the SEC, in addition to our Corporate
Governance Guidelines, codes of ethics and the charters of the Audit,
Compensation, Executive, Finance, Governance and Nominating, and Safety,
Environmental, and Public Policy Committees. These materials also may be
requested at no cost by telephone at (866) 814-6512 or by mail at: Massey Energy
Company, Post Office Box 26765, Richmond, Virginia 23261, Attention: Investor
Relations.
21
Executive
Overview
We
operate coal mines and processing facilities in Central Appalachia, which
generate revenues and cash flow through the mining, processing and selling of
steam and metallurgical grade coal, primarily of a low sulfur content. We also
generate income and cash flow through other coal-related businesses, including
the management of material handling facilities. Other revenue is obtained from
royalties, rentals, gas well revenues, gains on the sale or exchange of
non-strategic assets and miscellaneous income.
We
reported net income for the third quarter of 2009, of $16.5 million, or $0.19
per diluted share, compared to net income of $51.6 million, or $0.61 per diluted
share, for the third quarter of 2008. Third quarter 2009 net income included a
$24.9 million pre-tax non-cash gain on an exchange of coal reserves and other
assets. The reported net income for the third quarter of 2008 included the
following pre-tax charges: $9.1 million related to our consent
solicitation and tender offer for and redemption of $313.1 million of our 6.625%
Notes, $5.8 million related to the Wheeling-Pittsburgh Steel Corporation (“WPS”)
litigation, $6.1 million (non-cash) recorded in Interest expense related to the
early retirement of debt and a $6.5 million impairment on an investment in the
Primary Fund, a money market fund.
During
the third quarter of 2009, we acquired approximately 23 million tons of coal
reserves, permitted deep and surface mines, a permitted preparation plant and
associated refuse area, infrastructure and some mobile and mining equipment from
a third party for a cash payment of $5.2 million and the assumption of $14.3
million of asset retirement obligations.
On August
27, 2009, a fire destroyed the Bandmill preparation plant at our Logan County
resource group, located near Logan, West Virginia. This incident
significantly impacted the operations at Logan County and, to a lesser extent,
our operations as a whole during the quarter. Efforts
to replace production at the other Company locations to help mitigate the
effects of the fire, including meeting customer commitments, are ongoing.
We maintain property insurance and expect the level of insurance proceeds
will cover most, if not all, of the property losses incurred from the fire and
the cost associated with the reconstruction of the facility.
Produced tons sold were
8.7 million in the third quarter of 2009, compared to 10.3 million in the third
quarter of 2008. We produced 8.8 million and 10.4 million tons in the third
quarters of 2009 and 2008, respectively. The lower coal production in 2009 was
primarily the result of the idling of higher cost mines and the reduction of
hours worked, mainly overtime and weekend shifts, in response to lower demand.
Exports decreased from 2.1 million tons in the third quarter of 2008 to 1.4
million tons in the third quarter of 2009. Quarterly shipments of produced tons
for the fourth quarter of 2009 are expected to be lower than during the
comparable period of 2008. Increasing coal stockpiles due to
utilities shifting to gas fired generation and weak demand for electric power
generation and steel production in both domestic and international markets has
created challenges among our customer base to accept shipments of coal according
to contracted schedules. We are working with our customers to modify
shipment schedules and amend contract terms where necessary or appropriate,
which may affect our revenues and margins in future periods.
During
the third quarter of 2009, Produced coal revenue decreased by 20% compared to
the third quarter of 2008 reflecting lower shipments in 2009 and a 4% decrease
in average produced coal revenue per ton sold. Our average Produced
coal revenue per ton sold in the third quarter of 2009 decreased to $61.79
compared to $64.59 in the third quarter of 2008. Our average Produced coal
revenue per ton in the third quarter of 2009 for metallurgical tons sold
decreased by 13% to $84.58 from $97.47 in the third quarter of 2008. The average
per ton sales price for utility and industrial coal was higher in the third
quarter of 2009 compared to the third quarter of 2008, attributable to prices
contracted during prior periods when demand and pricing were elevated for these
grades of coal in the United States.
Our
Average cash cost per ton sold (see Note 1 below) was $49.81, compared to $48.49
in the previous year’s third quarter. The increased cost level is primarily due
to higher fixed cost absorption on lower volume shipped, and higher operating
lease costs. In response to the current difficult market conditions, we have
taken certain actions to reduce overall costs including the idling of several
higher cost mines, limitation of overtime, selective general and administrative
cost reductions, renegotiation of supply contracts and the implementation of
significant wage and benefit reductions beginning on May 1, 2009.
22
While
certain general business conditions appear to be improving, the recent
recession, credit crisis and related turmoil in the global financial system has
had and may continue to have a negative impact on our business, financial
condition and liquidity. We may face significant future challenges if
conditions in the financial markets do not continue to improve. Worldwide demand
for coal has been adversely impacted by the global recession. Demand
for metallurgical coal has been disproportionately affected as most steel
producers responded to the recession by significantly reducing production
levels. This, in turn, has led to lower sales volumes and a number
requests from our customers for the deferral of contracted shipments. These
conditions have negatively impacted our revenues. Additionally, the
volatility and disruption of financial markets has and could continue to affect
the creditworthiness of our customers and/or limit our customers’ ability to
obtain adequate financing to maintain operations. This could result
in a further decrease in sales volume that could have a further negative impact
on our cash flows, results of operations or financial condition.
The steel
industry and the global metallurgical coal markets have shown recent signs of
improvement. Several steel producers have announced plans to restart
idled blast furnaces and production capacity utilization rates have begun to
increase. The timing of any improvement is uncertain but if these trends
continue, it could have a positive impact on metallurgical coal demand and
improve our opportunities to sell our metallurgical coal products.
_____________________
Note 1:
Average cash cost per ton is calculated as the Cost of produced coal revenue
(excluding Selling, general and administrative expense (“SG&A”) and
Depreciation, depletion and amortization), divided by the number of produced
tons sold. In order to conform more closely to common industry reporting
practices, Massey has changed its calculation of cash cost to exclude SG&A
expense. This change has been reflected in the presentation of data for
both the current and comparative past reporting periods in this report. Although
Average cash cost per ton is not a measure of performance calculated in
accordance with GAAP, management believes that it is useful to investors in
evaluating us 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 GAAP. 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 GAAP measure of Total costs and expenses to Average
cash cost per ton.
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||||||||||||||
September
30,
|
September
30,
|
|||||||||||||||||||||||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||||||||||||||||
$ |
per
ton
|
$ |
per
ton
|
$ |
per
ton
|
$ |
per
ton
|
|||||||||||||||||||||||||||||
(In
Millions, Except Per Ton Amounts)
|
||||||||||||||||||||||||||||||||||||
Total
costs and expenses
|
$ | 595.8 | $ | 669.8 | $ | 1,940.1 | $ | 2,180.9 | ||||||||||||||||||||||||||||
Less:
Freight and handling costs
|
52.5 | 81.1 | 171.3 | 229.6 | ||||||||||||||||||||||||||||||||
Less:
Cost of purchased coal revenue
|
18.4 | 4.3 | 39.1 | 19.8 | ||||||||||||||||||||||||||||||||
Less:
Depreciation, depletion and
|
||||||||||||||||||||||||||||||||||||
amortization
|
66.3 | 65.2 | 206.6 | 187.8 | ||||||||||||||||||||||||||||||||
Less: Selling,
general
|
||||||||||||||||||||||||||||||||||||
and
adminstrative
|
21.5 | 2.8 | 63.4 | 62.8 | ||||||||||||||||||||||||||||||||
Less:
Other expense
|
0.6 | 1.1 | 2.0 | 2.4 | ||||||||||||||||||||||||||||||||
Less:
Litigation charge
|
- | 5.8 | - | 251.1 | ||||||||||||||||||||||||||||||||
Less: Loss
on refinancing
|
- | 9.1 | - | 9.1 | ||||||||||||||||||||||||||||||||
Less:
Loss (gain) on derivative instruments
|
4.8 | - | (4.5 | ) | - | |||||||||||||||||||||||||||||||
Average
cash cost
|
$ | 431.7 |
$49.81
|
$ | 500.4 |
$48.49
|
$ | 1,462.2 |
$50.64
|
$ | 1,418.3 |
$46.11
|
23
Results
of Operations
Three months ended September
30, 2009 compared to three months ended September 30, 2008
Revenues
Three
Months Ended
|
||||||||||||||||
September
30,
|
||||||||||||||||
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Revenues
|
||||||||||||||||
Produced
coal revenue
|
$ | 535,531 | $ | 666,440 | $ | (130,909 | ) | (20%) | ||||||||
Freight
and handling revenue
|
52,523 | 81,068 | (28,545 | ) | (35%) | |||||||||||
Purchased
coal revenue
|
14,570 | 4,484 | 10,086 | 225% | ||||||||||||
Other
revenue
|
38,936 | 11,304 | 27,632 | 244% | ||||||||||||
Total
revenues
|
$ | 641,560 | $ | 763,296 | $ | (121,736 | ) | (16%) |
The following is a breakdown by
market served of the changes in produced tons sold and average produced coal
revenue per ton sold for the third quarter of 2009, compared to the third
quarter of 2008:
Three
Months Ended
|
||||||||||||||||
September
30,
|
||||||||||||||||
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
(In
millions, except per ton amounts)
|
||||||||||||||||
Produced tons sold:
|
||||||||||||||||
Utility
|
6.1 | 6.7 | (0.6 | ) | (9%) | |||||||||||
Metallurgical
|
1.9 | 2.5 | (0.6 | ) | (24%) | |||||||||||
Industrial
|
0.7 | 1.1 | (0.4 | ) | (36%) | |||||||||||
Total
|
8.7 | 10.3 | (1.6 | ) | (16%) | |||||||||||
Average produced coal revenue per ton
sold:
|
||||||||||||||||
Utility
|
$ | 53.84 | $ | 51.90 | $ | 1.94 | 4% | |||||||||
Metallurgical
|
84.58 | 97.47 | (12.89 | ) | (13%) | |||||||||||
Industrial
|
69.26 | 65.89 | 3.37 | 5% | ||||||||||||
Weighted
average
|
$ | 61.79 | $ | 64.59 | $ | (2.80 | ) | (4%) |
Shipments
of utility, metallurgical and industrial coal declined during the third quarter
of 2009, compared to the same period in 2008, due to lower customer demand, as
the United States and world economies continue to feel the effects of the recent
severe recession. The decreases in metallurgical coal shipments and
metallurgical revenue per ton were the primary drivers behind the decrease in
Produced coal revenue. The average per ton sales price for metallurgical coal
was lower in the third quarter of 2009, compared to the third quarter of 2008,
as the recession significantly reduced steel producers demand and plant
utilization, negatively effecting the market price for metallurgical coal. The
average per ton sales price for utility and industrial coal was higher in the
third quarter of 2009, compared to the third quarter of 2008, primarily
attributable to prices contracted during prior periods when demand and pricing
were elevated for these grades of coal in the United States.
Freight
and handling revenue decreased in the third quarter of 2009, compared to the
same period in 2008, due to a reduction in the number of contracts in which
customers were required to pay freight in the third quarter of 2009 compared to
the third quarter of 2008, and due to a decrease in export tons sold from 2.1
million in the third quarter of 2008 to 1.4 million in the third quarter of
2009.
Purchased
coal revenue increased in the third quarter of 2009, compared to the same period
in 2008, as a result of a 0.2 million tons increase in the number of purchased
tons shipped.
24
Other
revenue includes refunds on railroad agreements, royalties related to coal lease
agreements, gas well revenue, gains on the sale or exchange of non-strategic
assets and reserve exchanges, joint venture revenue and other miscellaneous
revenue. Other revenue for the third quarter of 2009 includes a pre-tax gain of
$24.9 million on an exchange of coal reserves. Other revenue for the third
quarter of 2008 includes a pre-tax gain of $3.6 million on an exchange of coal
reserves.
Costs
Three
Months Ended
|
||||||||||||||||
September
30,
|
||||||||||||||||
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Costs
and expenses
|
||||||||||||||||
Cost
of produced coal revenue
|
$ | 431,697 | $ | 500,387 | $ | (68,690 | ) | (14%) | ||||||||
Freight
and handling costs
|
52,523 | 81,068 | (28,545 | ) | (35%) | |||||||||||
Cost
of purchased coal revenue
|
18,366 | 4,349 | 14,017 | 322% | ||||||||||||
Depreciation,
depletion and amortization, applicable to:
|
||||||||||||||||
Cost
of produced coal revenue
|
66,105 | 64,393 | 1,712 | 3% | ||||||||||||
Selling,
general and administrative
|
164 | 817 | (653 | ) | (80%) | |||||||||||
Selling,
general and administrative
|
21,549 | 2,820 | 18,729 | 664% | ||||||||||||
Other
expense
|
608 | 1,049 | (441 | ) | (42%) | |||||||||||
Litigation
charge
|
- | 5,835 | (5,835 | ) | - | |||||||||||
Loss
on derivative instruments
|
4,765 | - | 4,765 | - | ||||||||||||
Loss
on refinancing
|
- | 9,088 | (9,088 | ) | - | |||||||||||
Total
costs and expenses
|
$ | 595,777 | $ | 669,806 | $ | (74,029 | ) | (11%) |
Cost of produced coal revenue
decreased primarily due to decreased volume of produced tons sold from 10.3
million in the third quarter of 2008 to 8.7 million in the third quarter of
2009. The increase in cost of produced coal revenue on a per ton
basis was partially caused by higher operating lease costs, partially offset by
lower mining supplies and repair costs.
Freight
and handling costs decreased in the third quarter of 2009, compared to the same
period in 2008, due to a reduction in the number of contracts in which customers
were required to pay freight in the third quarter of 2009, compared to the third
quarter of 2008, and due to a decrease in export tons sold from 2.1 million in
the third quarter of 2008 to 1.4 million in the third quarter of
2009.
Cost of purchased coal revenue
increased in the third quarter of 2009, compared to the same period in 2008, as
a result of a 0.2 million tons increase in the number of purchased tons
shipped.
Selling,
general and administrative expense was significantly less in the third quarter
of 2008, compared to the third quarter of 2009, due to a reduction in
stock-based compensation accruals in 2008, caused by a substantial decrease in
the Company’s stock price during the third quarter of 2008.
Litigation
charge represents an accrual for a specific legal action related to the
litigation with WPS that was recorded in the third quarter of 2008.
Loss on
derivative instruments represents net losses of $4.8 million related to purchase
and sales contracts that qualify as derivatives (see Note 11 to the Notes to
Condensed Consolidated Financial Statements for further
discussion).
Loss on
refinancing represents the fees incurred for the consent solicitation and
tender offer for our 6.625% Notes recorded during the third quarter of
2008.
25
Interest
Income
Interest
income decreased for the third quarter of 2009, compared to the same period in
2008, as a result of significant reduction of rates on our interest bearing
investments.
Interest
Expense
Interest expense for the third
quarter of 2008 includes $1.9 million (pre-tax) for the write-off of unamortized
financing fees and $4.2 million for the write-off of unamortized interest rate
swap termination payment.
Income
Taxes
Our
effective tax rate is sensitive to changes in estimates of annual pre-tax
earnings and percentage depletion. The increase in the effective tax rate from
the third quarter of 2008 to the third quarter of 2009 is primarily the result
of differences in pre-tax income, the impact of percentage depletion and
projected changes in deferred taxable and deductible differences. Also impacting
the income tax rate for the third quarter of 2008, was the WPS litigation charge
and refinancing charges relating to our 6.625% Notes (discussed above), which
were treated as discrete items for the quarter.
Nine months ended September
30, 2009 compared to nine months ended September 30, 2008
Revenues
Nine
Months Ended
|
||||||||||||||||
September
30,
|
||||||||||||||||
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Revenues
|
||||||||||||||||
Produced
coal revenue
|
$ | 1,819,777 | $ | 1,919,976 | $ | (100,199 | ) | (5%) | ||||||||
Freight
and handling revenue
|
171,253 | 229,570 | (58,317 | ) | (25%) | |||||||||||
Purchased
coal revenue
|
43,741 | 22,025 | 21,716 | 99% | ||||||||||||
Other
revenue
|
72,504 | 63,188 | 9,316 | 15% | ||||||||||||
Total
revenues
|
$ | 2,107,275 | $ | 2,234,759 | $ | (127,484 | ) | (6%) |
The
following is a breakdown by market served of the changes in produced tons sold
and average produced coal revenue per ton sold for the first nine months of
2009, compared to the first nine months of 2008:
Nine
Months Ended
|
||||||||||||||||
September
30,
|
||||||||||||||||
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
(In
millions, except per ton amounts)
|
||||||||||||||||
Produced tons sold:
|
||||||||||||||||
Utility
|
21.4 | 19.9 | 1.5 | 8% | ||||||||||||
Metallurgical
|
5.5 | 7.8 | (2.3 | ) | (29%) | |||||||||||
Industrial
|
2.0 | 3.1 | (1.1 | ) | (35%) | |||||||||||
Total
|
28.9 | 30.8 | (1.9 | ) | (6%) | |||||||||||
Average produced coal revenue per ton
sold:
|
||||||||||||||||
Utility
|
$ | 53.74 | $ | 49.07 | $ | 4.67 | 10% | |||||||||
Metallurgical
|
97.60 | 97.25 | 0.35 | 0% | ||||||||||||
Industrial
|
68.25 | 60.41 | 7.84 | 13% | ||||||||||||
Weighted
average
|
$ | 63.02 | $ | 62.43 | $ | 0.59 | 1% |
Shipments
of utility coal increased in the first nine months of 2009, compared to the same
period in 2008, as production of utility quality coal increased, mainly as a
result of new mines started in 2008 and our contracted position for
2009. Shipments of metallurgical and industrial coal declined during
the first nine months of 2009,
26
Freight
and handling revenue decreased due to a reduction in the number of contracts in
which customers were required to pay freight in the first nine months of 2009,
compared to the first nine months of 2008, and by a decrease in export tons sold
from 6.2 million in the first nine months of 2008, to 4.6 million in the first
nine months of 2009.
Purchased
coal revenue increased in the first nine months of 2009, compared to the same
period in 2008, as a result of a 0.3 million tons increase in the number of
purchased tons shipped.
Other
revenue includes refunds on railroad agreements, royalties related to coal lease
agreements, gas well revenue, gains on the sale of non-strategic assets and
reserve exchanges, joint venture revenue and other miscellaneous revenue. Other
revenue for the first nine months of 2009 includes a pre-tax gain of $32.0
million on the sale and exchange of coal reserve interests and other assets.
Other revenue for the first nine months of 2008 includes a pre-tax gain of $32.5
million on exchanges of coal reserves.
Costs
Nine
Months Ended
|
||||||||||||||||
September
30,
|
||||||||||||||||
Increase
|
%
Increase
|
|||||||||||||||
2009
|
2008
|
(Decrease)
|
(Decrease)
|
|||||||||||||
(In
Thousands)
|
||||||||||||||||
Costs
and expenses
|
||||||||||||||||
Cost
of produced coal revenue
|
$ | 1,462,263 | $ | 1,418,275 | $ | 43,988 | 3% | |||||||||
Freight
and handling costs
|
171,253 | 229,570 | (58,317 | ) | (25%) | |||||||||||
Cost
of purchased coal revenue
|
39,061 | 19,783 | 19,278 | 97% | ||||||||||||
Depreciation,
depletion and amortization, applicable to:
|
||||||||||||||||
Cost
of produced coal revenue
|
204,524 | 185,200 | 19,324 | 10% | ||||||||||||
Selling,
general and administrative
|
2,025 | 2,569 | (544 | ) | (21%) | |||||||||||
Selling,
general and administrative
|
63,420 | 62,815 | 605 | 1% | ||||||||||||
Other
expense
|
1,970 | 2,457 | (487 | ) | (20%) | |||||||||||
Litigation
charge
|
- | 251,111 | (251,111 | ) | - | |||||||||||
Gain
on derivative instruments
|
(4,479 | ) | - | (4,479 | ) | - | ||||||||||
Loss
on refinancing
|
- | 9,088 | (9,088 | ) | - | |||||||||||
Total
costs and expenses
|
$ | 1,940,037 | $ | 2,180,868 | $ | (240,831 | ) | (11%) |
Cost of
produced coal revenue increased primarily due to higher production costs
including higher labor and operating lease costs, partially offset by lower
mining supplies and repair costs, during the first nine months of 2009, compared
to the same period in 2008.
Freight
and handling costs decreased due to a reduction in the number of contracts in
which customers were required to pay freight in the first nine months of 2009,
compared to the first nine months of 2008, and by a decrease in export tons sold
from 6.2 million in the first nine months of 2008 to 4.6 million in the first
nine months of 2009.
Cost of
purchased coal revenue increased in the first nine months of 2009, compared to
the same period in 2008, as a result of a 0.3 million tons increase in the
number of purchased tons shipped.
Litigation
charge represents an accrual for a specific legal action related to the
litigation with WPS that was recorded during the first nine months of
2008.
Gain on
derivative instruments represents net gains of $4.5 million related to purchase
and sales contracts that qualify as derivatives (see Note 11 to the Notes to
Condensed Consolidated Financial Statements for further
discussion).
27
Loss on
refinancing represents the fees incurred for the consent solicitation and
tender offer for our 6.625% Notes recorded during the first nine months of
2008.
Interest
Income
Interest
income decreased for the first nine months of 2009, compared to the same period
in 2008, as a result of significant reduction of rates on our interest bearing
investments in 2009, offset by $8.5 million in interest received related to
black lung excise tax refunds filed in 2008.
Interest
Expense
Interest expense increased for the
first nine months of 2009, compared to the same period of 2008, due to higher
outstanding debt balances in 2009, offset by $1.9 million (pre-tax) for the
write-off of unamortized financing fees and $4.2 million for the write-off of
unamortized interest rate swap termination payment included in the first nine
months of 2008.
Income
Taxes
Our
effective tax rate is sensitive to changes in estimates of annual pre-tax
earnings and percentage depletion. The increase in the effective tax rate from
the first nine months of 2008 to the first nine months of 2009 is primarily the
result of differences in pre-tax income, the impact of percentage depletion and
projected changes in deferred taxable and deductible differences. Also impacting
the income tax rate for the first nine months of 2008, was a favorable
adjustment for interest received from the IRS in connection with the closing of
a prior period audit, the WPS litigation charge and refinancing charges relating
to our 6.625% Notes (discussed above), which were treated as discrete items for
the first nine months of 2008.
Liquidity
and Capital Resources
At
September 30, 2009, our available liquidity was $714.4 million, comprised of
Cash and cash equivalents of $640.0 million and $74.4 million of availability
from our asset-based revolving credit facility (“ABL”). CIT Group,
Inc. (“CIT”) is a participant in our ABL. On October 1, 2009, CIT filed a
Current Report on Form 8-K with the SEC, reporting that it has commenced a
restructuring of its capital structure and that if CIT does not achieve the
objectives of the senior note exchange offers, as per the restructuring plan, it
may decide to initiate a voluntary filing under Chapter 11 of the U.S.
Bankruptcy Code. It is not certain whether CIT will honor its commitment to make
loans under the ABL or whether another lender under the ABL might assume CIT’s
commitment. Consequently, our ability to borrow under the ABL may be adversely
impacted. If CIT is unable to fund its commitment under our ABL and no other
lender assumes its commitment, the availability from our ABL may be reduced by
up to $25 million. As of September 30, 2009, we had a $15.1 million
investment in the Primary Fund, which is recorded in Short-term investment.
Subsequent to September 30, 2009, we received an additional distribution from
the Primary Fund in the amount for $4.3 million. Our total debt-to-book
capitalization ratio was 52.2% at September 30, 2009.
28
Our Debt
was comprised of the following:
September
30, 2009
|
December
31, 2008
|
|||||||
As
Adjusted
|
||||||||
(In
Thousands)
|
||||||||
6.875%
senior notes due 2013, net of discount
|
||||||||
of
$3,449 and $3,959, respectively
|
$ | 756,551 | $ | 756,041 | ||||
3.25%
convertible senior notes due 2015, net of discount
|
||||||||
of
$139,564 and $153,462, respectively
|
531,436 | 517,538 | ||||||
6.625%
senior notes due 2010
|
21,949 | 21,949 | ||||||
2.25%
convertible senior notes due 2024
|
9,647 | 9,647 | ||||||
4.75%
convertible senior notes due 2023
|
- | 70 | ||||||
Capital
lease obligations
|
4,736 | 6,912 | ||||||
Total
debt
|
1,324,319 | 1,312,157 | ||||||
Amounts
due within one year
|
(1,593 | ) | (1,976 | ) | ||||
Total
long-term debt
|
$ | 1,322,726 | $ | 1,310,181 |
We
believe that we are currently in compliance with our debt
covenants.
Convertible
Debt Securities
On
January 1, 2009, new accounting guidance became effective relating to our 3.25%
Notes. Upon adoption on the effective date, the new accounting guidance was
retroactively applied. This resulted in $4.8 million and $13.9 million of
additional non-cash interest expense recorded for the three and nine months
ended September 30, 2009, respectively, and $2.9 million of additional non-cash
interest expense recorded for both the three and nine months ended September 30,
2008. The impact to Earnings per share was a decrease of $0.03 and $0.10 for the
three and nine months ended September 30, 2009, respectively, and a decrease of
$0.03 for both the three and nine months ended September 30, 2008. We separately
account for the liability and equity components in a manner reflective of our
nonconvertible debt borrowing rate, which was determined to be 7.75% at the date
of issuance of the 3.25% Notes. The discount associated with the 3.25% Notes
will be amortized via the effective-interest method increasing the reported
liability until the notes are carried at par value on their maturity
date.
4.75%
Notes
During
May 2009, we redeemed at par the remaining $70,000 of the 4.75% convertible
senior notes due 2023.
Asset-Based Credit
Facility
We
maintain an ABL, which provides for available borrowings, including letters of
credit, of up to $175 million, depending on the level of eligible inventory and
accounts receivable. The facility expires on May 15, 2010; however if the 6.625%
Notes have been refinanced, defeased, or paid in full by May 15, 2010, the
expiration date is extended to August 15, 2011. The ABL’s borrowing base is the
sum of 85% of the eligible accounts receivable plus the lesser of (1) up to 65%
of eligible inventory and (2) up to 85% of the net orderly liquidation value of
eligible inventory, minus any reserves set by the administrative agent from time
to time.
As of
September 30, 2009, there were $78.9 million of letters of credit issued and
there were no outstanding borrowings under our ABL. We had $153.3
million of availability, which was $21.7 million less than the maximum of $175
million due to a lower level of accounts receivable. As a result, we had $74.4
million of borrowing capacity at September 30, 2009. However, as a result
of a higher level of accounts receivable, $166.6 million was available under our
ABL as of October 28, 2009, which provided us with $87.7 million of borrowing
capacity at such date.
29
Common
Stock Offering Program
On
February 3, 2009, pursuant to Rule 424(b)(5), we filed a prospectus supplement
with the Securities and Exchange Commission (“SEC”) allowing us to sell up to
5.0 million shares of Common Stock from time to time at our discretion.
The proceeds from any shares of Common Stock sold will be used for general
corporate purposes, which may include funding for acquisitions or investments in
business, products, or technologies, and repurchases and repayment of our
indebtedness. As of September 30, 2009, no shares of Common Stock had
been sold pursuant to this program.
Cash
Flow
Net cash
provided by operating activities was $232.1 million for the nine months ended
September 30, 2009 compared to $426.0 million for the nine months ended
September 30, 2008. Cash provided by operating activities reflects Net income
adjusted for non-cash charges and changes in working capital
requirements.
Net cash
utilized by investing activities was $183.0 million and $743.1 million for the
nine months ended September 30, 2009 and 2008, respectively. The cash used in
investing activities reflects capital expenditures in the amount of $223.0
million and $532.0 million for the nine months ended September 30, 2009 and
2008, respectively. These capital expenditures are for replacement of mining
equipment, the expansion of mining and shipping capacity, projects to improve
the efficiency of mining operations and for compliance with safety
regulations. Additionally, the nine months ended September 30, 2009
and 2008 included $15.7 million and $6.8 million, respectively, of proceeds
provided by the sale of assets.
Net cash
utilized and provided by financing activities was $16.1 million and $618.2
million for the nine months ended September 30, 2009 and 2008,
respectively. Financing activities for the nine months ended
September 30, 2009 primarily reflects change in debt levels and payments of
dividends. Financing activities for the nine months ended September 30, 2008,
primarily reflects proceeds from issuing convertible senior notes and common
stock, partially offset by a tender offer payment on senior notes.
We
believe that cash on hand, cash generated from operations and our borrowing
capacity will be sufficient to meet our working capital requirements, scheduled
debt payments, potential share repurchases and debt repurchases, anticipated
dividend payments, expected settlements of outstanding litigation and
anticipated capital expenditures for at least the next twelve months.
Nevertheless, our ability to satisfy our debt service obligations, repurchase
shares and debt, pay dividends, pay settlements or judgments in respect of
pending litigation or fund planned capital expenditures, will substantially
depend upon our future operating performance, which will be affected by
prevailing economic conditions in the coal industry, debt covenants and
financial, business and other factors, some of which are beyond our control. We
frequently evaluate potential acquisitions. In the past, we have funded
acquisitions primarily with cash generated from operations. As a result of the
cash needs we have described above and possible acquisition opportunities, in
the future we may consider a variety of financing sources, including debt or
equity financing. Currently, other than our ABL, we have no
commitments for any additional financing. We cannot be certain that
we will be able to replace our ABL when it expires or that we will be able to
obtain additional financing on terms that we find acceptable, if at all, through
the issuance of equity securities or the incurrence of additional
debt. Additional equity financing may dilute our stockholders, and
debt financing, if available, may among other things, restrict our ability to
repurchase shares of Common Stock, declare and pay dividends and raise future
capital. If we are unable to obtain additional needed financing, it
may prohibit us from making acquisitions, capital expenditures and/or
investments, which could materially and adversely affect our prospects for
long-term growth.
Certain
Trends and Uncertainties
In
addition to trends and uncertainties set forth below, please refer to “Certain
Trends and Uncertainties” of Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operation, of our Annual Report on Form 10-K
for the year ended December 31, 2008, for a discussion of certain trends and
uncertainties that may impact our business.
30
We
must obtain governmental permits and approvals for mining operations, which can
be a costly and time-consuming process, can result in restrictions on our
operations, and is subject to litigation that may delay or prevent us from
obtaining necessary permits.
Our
operations are principally regulated under surface mining permits issued
pursuant to the Surface Mining Control and Reclamation Act and state counterpart
laws. Such permits are issued for terms of five years with the right of
successive renewal. Separately, the Clean Water Act requires permits for
operations that discharge into waters of the United States. Valley fills and
refuse impoundments are authorized under permits issued by the U.S. Army Corps
of Engineers (the “Corps”). The Environmental Protection Agency (the “EPA”) has
the authority, which it has rarely exercised until recently, to object to
permits issued by the Corps. While the Corps is authorized to issue
permits even when the EPA has objections, the EPA does have the ability to
override the Corps decision and “veto” the permits. In September 2009, the EPA
announced it had identified 79 pending permit applications for Appalachian
surface coal mining, under a coordination process with the Corps and the United
States Department of the Interior entered into in June 2009, that EPA believes
warrant further review because of its continuing concerns about water quality
and/or regulatory compliance issues. These include five of
our permit applications. While the EPA has stated that its
identification of these 79 permits does not constitute a determination that the
mining involved cannot be permitted under the Clean Water Act and does not
constitute a final recommendation from the EPA to the Corps on these projects,
it is unclear how long the further review will take for our five
permits or what the final outcome will be. It is also unclear what
impact this process may have on our future applications for surface coal mining
permits. Permitting under the Clean Water Act has been a frequent subject
of litigation by environmental advocacy groups that has resulted in periodic
delays in such permits issued by the Corps. Additionally, certain operations
(particularly preparation plants) have permits issued pursuant to the Clean Air
Act and state counterpart laws allowing and controlling the discharge of air
pollutants. Regulatory authorities exercise considerable discretion in the
timing of permit issuance. Requirements imposed by these authorities may be
costly and time-consuming and may result in delays in, or in some instances
preclude, the commencement or continuation of development or production
operations. Adverse outcomes in lawsuits challenging permits or failure to
comply with applicable regulations could result in the suspension, denial or
revocation of required permits, which could have a material adverse impact on
our cash flows, results of operations or financial condition. See also Note 13,
“Contingencies – Surface Mining Fills” to the Notes to Condensed Consolidated
Financial Statements in this Quarterly Report on Form 10-Q.
Concerns
about the environmental impacts of coal combustion, including perceived impacts
on global climate change, are resulting in increased regulation of coal
combustion in many jurisdictions, and interest in further regulation, which
could significantly affect demand for our products.
The Clean
Air Act and similar state and local laws extensively regulate the amount of
sulfur dioxide, particulate matter, nitrogen oxides and other compounds emitted
into the air from electric power plants, which are the largest end-users of our
coal. Such regulation may require significant emissions control expenditures for
many coal-fired power plants. As a result, the generators may switch to other
fuels that generate less of these emissions or install more effective pollution
control equipment, possibly reducing future demand for coal and the construction
of coal-fired power plants. The majority of our coal supply agreements contain
provisions that allow a purchaser to terminate its contract if legislation is
passed that either restricts the use or type of coal permissible at the
purchaser’s plant or results in specified increases in the cost of coal or its
use.
Global
climate change continues to attract considerable public and scientific
attention. Widely publicized scientific reports, such as the Fourth Assessment
Report of the Intergovernmental Panel on Climate Change released in 2007, have
also engendered widespread concern about the impacts of human activity,
especially fossil fuel combustion, on global climate change. A considerable and
increasing amount of attention in the United States is being paid to global
climate change and to reducing greenhouse gas emissions, particularly from coal
combustion by power plants. According to the EIA report, “Emissions of
Greenhouse Gases in the United States 2007,” coal combustion accounts for 30% of
man-made greenhouse gas emissions in the United States. In April, the EPA
released a proposed rule making an "endangerment finding" with respect to six
greenhouse gases, including carbon dioxide, due to effects on public health and
welfare; if finalized, such a finding would trigger the process under the Clean
Air Act for developing air quality standards for these greenhouse gases and
establishing emission standards for sources. In June of 2009, the U.S. House of
Representatives passed the so-called “Waxman-Markey” bill, which provides for
substantial reductions in greenhouse gases, including carbon dioxide, through a
“cap and trade”
31
system.
“Cap and Trade” legislation was also introduced in the U.S. Senate in the fall
of 2009. Further developments in connection with legislation, regulations or
other limits on greenhouse gas emissions and other environmental impacts from
coal combustion, both in the United States and in other countries where we sell
coal, could have a material adverse effect on our cash flows, results of
operations or financial condition.
Off-Balance
Sheet Arrangements
In the
normal course of business, we are a party to certain off-balance sheet
arrangements including guarantees, operating leases, 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 Condensed Consolidated Balance Sheets,
and, except for the operating leases, we do not expect any material impact on
our cash flows, results of operations or financial condition to result from
these off-balance sheet arrangements.
From time
to time we use bank letters of credit to secure our obligations for workers’
compensation programs, various insurance contracts and other obligations. At
September 30, 2009, we had $124.0 million of letters of credit outstanding of
which $45.1 million was collateralized by $46.0 million of cash deposited in
restricted, interest bearing accounts pledged to issuing banks and $78.9 million
was issued under our asset based lending arrangement. No claims were outstanding
against those letters of credit as of September 30, 2009.
We use
surety bonds to secure reclamation, workers’ compensation, wage payments and
other miscellaneous obligations. As of September 30, 2009, we had $401.1 million
of outstanding surety bonds. These bonds were in place to secure obligations as
follows: post-mining reclamation bonds of $318.5 million, an appeal bond of
$72.0 million of cash as collateral in the Harman litigation (see Note 13 to the
Notes to Condensed Consolidated Financial Statements for more information), and
other miscellaneous obligation bonds of $10.6 million. Outstanding surety bonds
of $46.1 million are secured with letters of credit.
Generally,
the availability and market terms of surety bonds continue to be challenging. If
we are unable to meet certain financial tests and ratings requirements
applicable to some of our surety bonds, or to the extent that surety bonds
otherwise become unavailable, we would need to replace the surety bonds or seek
to secure them with letters of credit, cash deposits or other suitable forms of
collateral.
Critical
Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect reported amounts. These estimates
and assumptions are based on information available as of the date of the
financial statements. Accounting measurements at interim dates inherently
involve greater reliance on estimates than at year-end. The results of
operations for the quarterly period ended September 30, 2009, are not
necessarily indicative of results that can be expected for the full year. Please
refer to the section entitled “Critical Accounting Estimates and Assumptions” of
Item 7. Management’s Discussion and Analysis of Financial Condition and Results
of Operation of our Annual Report on Form 10-K for the year ended December 31,
2008, for a discussion of our critical accounting estimates and
assumptions.
Item
3: Quantitative and Qualitative Discussions About Market
Risk
In
addition to quantitative and qualitative discussions about market risk set forth
below, please refer to Item 7A. Quantitative and Qualitative Discussions About
Market Risk of our Annual Report on Form 10-K for the year ended December 31,
2008, for a discussion of certain market risk factors, which may impact our
business.
Our
derivative contracts give rise to commodity price risk, which represents the
potential gain or loss that can be caused by an adverse change in the price of
coal. See Note 11 to the Notes to Condensed Consolidated Financial Statements
for further discussion of our derivatives. The outstanding purchase and sales
contracts at September 30, 2009, that are accounted for as derivative
instruments in accordance with GAAP, are summarized as follows:
Price
Range
|
Tons
Outstanding
|
Delivery
Period
|
|||||||
Purchase
Contracts
|
$43.75 - $98.00 | 1,829,250 |
10/01/09
- 12/31/10
|
||||||
Sales
Contracts
|
$47.25 - $75.00 | 2,387,250 |
10/01/09
- 12/31/10
|
32
As of
September 30, 2009, a hypothetical increase of 10% in the forward market price
would result in an additional fair value loss recorded for these derivative
instruments of $3.1 million. A hypothetical decrease of 10% in the
forward market price would result in a fair value gain recorded for these
derivative instruments of $3.1 million.
Item
4: Controls and Procedures
Pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), we carried out an evaluation, with the participation of our
management, including our Chief Executive Officer (“CEO”), who is our principal
executive officer, and Chief Financial Officer (“CFO”), who is our principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the
end of the period covered by this report. Based upon that evaluation, our CEO
and CFO concluded that our disclosure controls and procedures are effective to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act, is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to our management,
including our CEO and CFO, as appropriate, to allow timely decisions regarding
required disclosure.
There has
been no change in our internal control over financial reporting during the three
months ended September 30, 2009, that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Our
management, including our CEO and CFO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of the controls can
provide absolute assurance that all control issues and instances of fraud, if
any, have been detected.
PART II: OTHER
INFORMATION
Item
1. Legal Proceedings
The
following describes material developments in legal proceedings affecting us, as
previously described in Part I, Item 3. Legal Proceedings, of our Annual Report
on Form 10-K for the year ended December 31, 2008, and in subsequently filed
interim reports, as they relate to the fiscal quarter ended September 30, 2009.
Certain other information responsive to this Item 1. is contained in Note 13,
“Contingencies,” of the Notes to Condensed Consolidated Financial Statements in
this Quarterly Report on Form 10-Q and is incorporated herein by
reference.
Shareholder
Suits
On July
2, 2007, Manville Personal Injury Trust (“Manville”) filed a suit in the Circuit
Court of Kanawha County, West Virginia (the “Circuit Court”), which suit was
amended on December 14, 2007, styled as a shareholder derivative action
asserting that it was a shareholder acting on our behalf. We were named as a
nominal defendant. Each of the then members of our Board of Directors, certain
of our officers and certain of our former directors and officers were named as
defendants (“Manville Defendants”). The complaint alleged breach of
fiduciary duties to us arising out of the Manville Defendants’ alleged failure
to cause us to comply with applicable state and federal environmental and
worker-safety laws and regulations. The complaint sought to recover unspecified
damages in favor of us, appropriate equitable relief and an award to Manville,
respectively, of the costs and expenses associated with these actions. On
September 7, 2007, Mr. Vernon Mercier filed a similar action in the United
States District Court, Southern District of West Virginia (the “District
Court”), styled as a shareholder derivative action asserting that he is a
shareholder acting on our behalf (the “Vernon Mercier Action”). We are named as
a nominal defendant. Each of the then members of our Board of Directors and
certain of our officers and one former officer were named as defendants
(“Original Vernon Mercier Defendants”).
33
On May
20, 2008, the Circuit Court entered an order preliminarily approving a
settlement agreement in the Manville action. A final settlement hearing was held
on June 25, 2008, and, rejecting the objections of Mr. Mercier, on June 30,
2008, the Circuit Court entered a final order approving the settlement and
dismissing the Manville action with prejudice. The settlement agreement requires
us to make certain corporate governance changes and pay Manville’s counsel fees
and expenses in the amount of $2.7 million as compensation for professional
services rendered and expenses incurred in the prosecution of the litigation.
This payment was made on July 15, 2008. Mr. Mercier declined to appeal this
ruling.
On
December 5, 2008, Mr. Mercier filed an Amended Complaint in the District Court,
adding new members of our Board of Directors and additional employees to the
Original Vernon Mercier Defendants (collectively, the “Vernon Mercier
Defendants”), restating his original claim and adding claims for breach of
fiduciary duty in connection with approval of the settlement of the Manville
action and our CEO’s compensation package and a purported failure to comply with
the terms of the settlement of the Manville action. On February 27, 2009, the
Vernon Mercier Defendants jointly moved to dismiss the Amended Complaint,
contending that the settlement in the Manville action bars Mr. Mercier from
continuing to prosecute his federal court action and that Mr. Mercier’s claims
otherwise lack merit. On September 30, 2009, the District Court granted the
Vernon Mercier Defendants’ motions to dismiss. The District Court indicated it
would issue the judgment order after it ruled upon the Vernon Mercier
Defendants’ motion for sanctions against Mr. Mercier and his
attorneys. At the request of Mr. Mercier and his attorneys, the Vernon Mercier
Defendants agreed to drop their motion for sanctions in exchange for Mr. Mercier
and his attorneys’ agreement not to appeal, collaterally attack or otherwise
challenge the effect of the District Court’s decision. On October 21, 2009, the
parties filed a joint stipulation and proposed order pursuant to which the
Vernon Mercier Defendants agreed to withdraw their motion for sanctions against
Mr. Mercier and his attorneys in exchange for their agreement not to appeal,
collaterally attack or otherwise challenge the effect of the District Court’s
judgment. On October 26, 2009, the District Court approved the
stipulation and settlement and dismissed the action with
prejudice.
We are
subject to a variety of risks, including, but not limited to those referenced
under the heading “Certain Trends and Uncertainties” of Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations of this
Quarterly Report on Form 10-Q and those referenced herein to other Items
contained in our Annual Report on Form 10-K for the year ended December 31,
2008, including Item 1. Business, under the headings “Customers and Coal
Contracts,” “Competition,” and “Environmental, Safety and Health Laws and
Regulations,” Item 1A. Risk Factors, Item 3. Legal Proceedings and Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, under the headings “Critical Accounting Estimates and Assumptions,”
“Certain Trends and Uncertainties” and elsewhere in Management’s Discussion and
Analysis of Financial Condition and Results of Operations. Except as set forth
under “Certain Trends and Uncertainties” and elsewhere under Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations of this Quarterly Report on Form 10-Q, we do not believe there have
been any material changes to the risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2008.
34
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes
information about shares of Common Stock that were purchased during the second
quarter of 2009.
Period
|
Total
Number of Shares Purchased
|
Average
Price Paid per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(1)
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plan
|
|||||||||||||
(In
Thousands, Except Average Price Paid Per Share)
|
|||||||||||||||||
July
1 through July 31
|
- | - | - | - | |||||||||||||
August
1 through August 31
|
- | - | - | - | |||||||||||||
September
1 through September 30
|
- | - | - | - | |||||||||||||
Total
|
- | - | 15,059,161 |
(2)
|
(1)
|
We
maintain a share repurchase program (the “Repurchase Program”), which was
authorized by the Board of Directors and announced on November 14, 2005
that provides we may repurchase shares of Common Stock for an aggregate
amount not to exceed $500 million. The Repurchase Program does not require
us to acquire any specific number of shares, may be terminated at any time
and has no expiration date.
|
||||||||
(2)
|
Calculated
using the $420 million that may yet be purchased under the
Repurchase Program and a price per share of $27.89, the closing price of
Common Stock as reported on the New York Stock Exchange on September 30,
2009.
|
4.1
|
Fourth
Supplemental Indenture, dated August 28, 2009 by and among Massey Energy
Company, subsidiaries of Massey Energy Company, as Guarantors, and
Wilmington Trust Company, as Trustee, supplementing that certain Senior
Indenture dated May 29, 2003 in connection with the Company’s 2.25%
convertible senior notes. [filed herewith]
|
4.2
|
Third
Supplemental Indenture, dated August 28, 2009 by and among Massey Energy
Company, subsidiaries of Massey Energy Company, as Guarantors, and
Wilmington Trust Company, as Trustee, supplementing that certain Senior
Indenture dated November 10, 2003 in connection with the Company’s 6.625%
senior notes. [filed herewith]
|
4.3
|
Second
Supplemental Indenture, dated August 28, 2009 by and among Massey Energy
Company, subsidiaries of Massey Energy Company, as Guarantors, and
Wilmington Trust Company, as Trustee, supplementing that certain Senior
Indenture dated November 10, 2003 in connection with the Company’s 6.875%
senior notes. [filed herewith]
|
4.4
|
Third
Supplemental Indenture, dated August 28, 2009 by and among Massey Energy
Company, subsidiaries of Massey Energy Company, as Guarantors, and
Wilmington Trust Company, as Trustee, supplementing that certain Senior
Indenture dated August 12, 2008 in connection with the Company’s 3.25%
convertible senior notes. [filed herewith]
|
31.1
|
Certification
of Chief Executive Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 [filed herewith]
|
31.2
|
Certification
of Chief Financial Officer, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 [filed herewith]
|
32.1
|
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 [furnished
herewith]
|
32.2
|
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 [furnished
herewith]
|
101
|
Interactive
Data File (Quarterly Report on Form 10-Q, for the quarterly period ended
September 30, 2009, furnished in XBRL (eXtensible Business Reporting
Language)).
|
35
Attached
as Exhibit 101 to this report are the following documents formatted in
XBRL: (i) the Condensed Consolidated Statement of Income for the
three months ended September 30, 2009 and 2008, (ii) the Condensed
Consolidated Balance Sheet at September 30, 2009 and December 31,
2008, (iii) the Condensed Consolidated Statement of Cash Flows for
the three months ended September 30, 2009 and 2008 and (iv) the Notes to
Condensed Consolidated Financial Statements, tagged as blocks of text.
Users of this data are advised pursuant to Rule 406T of Regulation
S-T that this interactive data file is deemed not filed or part of a
registration statement or prospectus for purposes of sections 11 or 12 of
the Securities Act of 1933, is deemed not filed for purposes of section 18
of the Securities and Exchange Act of 1934, and otherwise is not subject
to liability under these sections.
|
36
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MASSEY ENERGY COMPANY | |
(Registrant) | |
Date: October 28, 2009 | /s/ Eric B. Tolbert |
Eric B. Tolbert | |
Vice President and Chief Financial Officer | |
Date: October 28, 2009 | /s/ David W. Owings |
David W. Owings | |
Controller | |
37