10-K/A 1 d10ka.txt AMENDMENT NO. 1 TO FORM 10-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A Amendment No. 1 (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 2001 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File No. 1-7775 MASSEY ENERGY COMPANY (Exact name of registrant as specified in its charter) Delaware (I.R.S. Employer (State or other jurisdiction of Identification Number) incorporation or organization) 4 North 4th Street, Richmond, Virginia 23219 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (804) 788-1800 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common stock, $0.625 par value Name of each exchange on which registered New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market of the registrant's voting stock held by non-affiliates was $1,550,160,567.70 on December 31, 2001 based on the volume weighted average sales price of the registrant's Common Stock. Common Stock, $0.625 par value, outstanding as of December 31, 2001 - 74,773,920 shares. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates certain information by reference from the registrant's definitive proxy statement for the 2002 annual meeting of shareholders, which proxy statement will be filed no later than 120 days after the close of the registrant's fiscal year ended October 31, 2001. ================================================================================ Explanatory Note This Amendment No. 1 to the Annual Report on Form 10-K of Massey Energy Company for the fiscal year ended October 31, 2001, is being filed to correct a typographical error in "Adjustments to reconcile net earnings to cash provided by operating activities: Increase in pension and other assets" in "Massey Energy Company - Consolidated Statements of Cash Flows" on page 32 of the Form 10-K originally filed on January 29, 2002. The line item that originally read "Increase in pension and other assets.......(25,237) (30,013) (36,733)" now reads "Decrease (increase) in pension and other assets.......25,237 (30,013) (36,733)." The total for "Cash provided by operating activities" as well as the remainder of the "Massey Energy Company--Consolidated Statements of Cash Flows" are correct and remain the same. There are no other changes to the originally filed Form 10-K. All information in this Amendment No. 1 is as of October 31, 2001, and does not reflect any subsequent information or events other than the change referred to above. 2 Part II Item 8. Financial Statements and Supplementary Data. REPORT OF INDEPENDENT AUDITORS To the Shareholders of Massey Energy Company We have audited the accompanying consolidated balance sheets of Massey Energy Company as of October 31, 2001 and 2000, and the related consolidated statements of earnings, cash flows, and shareholders' equity for each of the three years in the period ended October 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Massey Energy Company at October 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended October 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Richmond, Virginia January 25, 2002 3 MASSEY ENERGY COMPANY CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands, Except Per Share Amounts)
Year Ended October 31, -------------------------------- 2001 2000 1999 ---------- ---------- ---------- Net sales......................................... $1,203,285 $1,081,027 $1,076,059 Other revenue..................................... 50,471 59,645 38,393 ---------- ---------- ---------- Total revenue.............................. 1,253,756 1,140,672 1,114,452 ---------- ---------- ---------- Costs and expenses................................ Cost of sales.................................. 1,024,075 837,072 774,820 Depreciation, depletion and amortization................................. 181,269 171,336 167,558 Selling, general and administrative............ 31,702 35,364 32,696 ---------- ---------- ---------- Total costs and expenses................... 1,237,046 1,043,772 975,074 ---------- ---------- ---------- Income from operations............................ 16,710 96,900 139,378 Interest income................................... 8,747 25,661 14,426 Interest expense.................................. (34,214) (347) (803) ---------- ---------- ---------- (Loss) Earnings before taxes...................... (8,757) 122,214 153,001 Income tax (benefit) expense...................... (7,707) 43,410 49,561 ---------- ---------- ---------- Net (loss) earnings........................ $ (1,050) $ 78,804 $ 103,440 ========== ========== ========== (Loss) Earnings per share Basic.......................................... $ (0.01) $ 1.07 $ 1.41 ========== ========== ========== Diluted........................................ $ (0.01) $ 1.07 $ 1.41 ========== ========== ========== Shares used to calculate (loss) earnings per share Basic.......................................... 73,858 73,469 73,469 ========== ========== ========== Diluted........................................ 73,858 73,472 73,476 ========== ========== ==========
See Notes to Consolidated Financial Statements. 4 MASSEY ENERGY COMPANY CONSOLIDATED BALANCE SHEETS (In Thousands of Dollars)
At October 31, --------------------- 2001 2000 ---------- ---------- ASSETS ------ Current Assets Cash and cash equivalents............................................ $ 5,664 $ 6,929 Trade and other accounts receivable.................................. 198,885 215,574 Inventories.......................................................... 141,483 104,132 Deferred taxes....................................................... 13,572 8,398 Income taxes receivable.............................................. 1,880 -- Prepaid expenses and other........................................... 93,620 67,813 ---------- ---------- Total current assets............................................. 455,104 402,846 Net Property, Plant and Equipment....................................... 1,613,133 1,559,426 Other Noncurrent Assets Pension assets....................................................... 80,400 67,740 Other................................................................ 120,029 124,018 ---------- ---------- Total other noncurrent assets.................................... 200,429 191,758 ---------- ---------- Total assets..................................................... $2,268,666 $2,154,030 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current Liabilities Accounts payable, principally trade and bank overdrafts.............. $ 185,903 $ 153,457 Short-term debt...................................................... 248,231 -- Payroll and employee benefits........................................ 37,878 30,784 Income taxes payable................................................. -- 5,122 Other current liabilities............................................ 68,159 78,420 ---------- ---------- Total current liabilities........................................ 540,171 267,783 Long-term debt.......................................................... 300,000 -- Noncurrent Liabilities Deferred taxes....................................................... 254,115 254,022 Other................................................................ 308,030 257,607 ---------- ---------- Total noncurrent liabilities..................................... 562,145 511,629 Shareholders' Equity Capital Stock........................................................ Preferred stock - authorized 20,000,000 shares; no par; none issued -- -- Common stock - authorized 150,000,000 shares; $0.625 par; issued and outstanding - 74,543,670 shares.................................... 46,590 -- Additional Capital................................................... 15,541 -- Retained earnings.................................................... 810,925 -- Unamortized executive stock plan expense............................. (6,706) -- Net investment by Fluor Corporation.................................. -- 1,653,682 Due from Fluor Corporation........................................... -- (279,064) ---------- ---------- Total shareholders' equity....................................... 866,350 1,374,618 ---------- ---------- Total liabilities and shareholders' equity....................... $2,268,666 $2,154,030 ========== ==========
See Notes to Consolidated Financial Statements. 5 MASSEY ENERGY COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands of Dollars)
Year Ended October 31, -------------------------------- 2001 2000 1999 ---------- ---------- ---------- Cash Flows From Operating Activities Net (loss) earnings................................................ $ (1,050) $ 78,804 $ 103,440 Adjustments to reconcile net earnings to cash provided by operating activities: Depreciation, depletion and amortization........................ 181,269 171,336 167,558 Deferred taxes.................................................. (1,466) 28,228 42,409 Loss (gain) on disposal of assets............................... 1,698 (26,330) (8,982) Changes in operating assets and liabilities Decrease (increase) in accounts receivable...................... 4,603 (42,801) (6,653) Increase in inventories......................................... (40,350) (12,349) (20,089) Increase in prepaid expenses and other current assets........... (25,461) (13,983) (7,578) Decrease (increase) in pension and other assets................. 25,237 (30,013) (36,733) Increase (decrease) in accounts payable and bank overdrafts..... 32,446 (6,729) 19,850 (Decrease) increase in accrued income taxes..................... (7,002) 2,197 (11,340) Decrease in other accrued liabilities........................... (4,068) (5,204) (10,007) Increase in other non-current liabilities....................... 36,735 11,135 4,609 ---------- ---------- ---------- Cash provided by operating activities....................... 202,591 154,291 236,484 ---------- ---------- ---------- Cash Flows From Investing Activities Capital expenditures............................................ (247,517) (204,835) (230,001) Proceeds from sale of assets.................................... 5,071 31,468 6,437 ---------- ---------- ---------- Cash utilized by investing activities....................... (242,446) (173,367) (223,564) ---------- ---------- ---------- Cash Flows From Financing Activities Decrease in short-term debt, net................................ (29,998) -- -- Decrease (increase) in amount due from Fluor Corporation........ 67,554 1,352 (15,012) Equity contributions from Fluor Corporation..................... 2,476 17,069 7,739 Cash dividends paid............................................. (11,811) -- -- Stock options exercised......................................... 9,369 -- -- Other, net.................................................. 1,000 (467) (1,247) ---------- ---------- ---------- Cash provided (utilized) by financing activities......... 38,590 17,954 (8,520) ---------- ---------- ---------- (Decrease) increase in cash and cash equivalents................... (1,265) (1,122) 4,400 Cash and cash equivalents at beginning of period................... 6,929 8,051 3,651 ---------- ---------- ---------- Cash and cash equivalents at end of period......................... $ 5,664 $ 6,929 $ 8,051 ========== ========== ========== Supplemental disclosure of cash flow information Cash paid during the fiscal year for income taxes............... $ 1,656 $ 12,834 $ 18,492 ========== ========== ==========
See Notes to Consolidated Financial Statements. 6 MASSEY ENERGY COMPANY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In Thousands of Dollars except share amounts)
Common Stock -------------- Unamortized Net Executive Investment by Due From Total Additional Stock Plan Fluor Fluor Retained Shareholders' Shares Amount Capital Expense Corporation Corporation Earnings Equity ------ ------- ---------- ----------- ------------- ----------- --------- ------------- Balance at October 31, 1998... $ 1,446,630 $(265,404) $1,181,226 Net earnings.................. 103,440 103,440 Capital contributions......... 7,739 7,739 Net change in amount due from Fluor Corporation...... (15,012) (15,012) ------ ------- ------- -------- ------------ ---------- --------- ---------- Balance at October 31, 1999... $ 1,557,809 $(280,416) $1,277,393 ------ ------- ------- -------- ------------ ---------- --------- ---------- Net earnings.................. 78,804 78,804 Capital contributions......... 17,069 17,069 Net change in amount due from Fluor Corporation...... 1,352 1,352 ------ ------- ------- -------- ------------ ---------- --------- ---------- Balance at October 31, 2000... $ 1,653,682 $(279,064) $1,374,618 ------ ------- ------- -------- ------------ ---------- --------- ---------- Net loss...................... (1,050) (1,050) Capital contributions......... 2,476 2,476 Net change in amount due from Fluor Corporation...... 67,554 67,554 Spin-Off transaction.......... 73,469 45,918 (3,840) (1,656,158) 211,510 826,748 (575,822) Dividends declared ($0.20 per share)........... (14,773) (14,773) Exercise of stock options, net 817 511 8,858 9,369 Stock option tax benefit...... 2,611 2,611 Amortization of executive stock plan expense.......... 1,367 1,367 Issuance of restricted stock, net......................... 258 161 4,072 (4,233) -- ------ ------- ------- -------- ------------ ---------- --------- ---------- Balance at October 31, 2001... 74,544 $46,590 $15,541 $(6,706) -- -- $ 810,925 $ 866,350 ====== ======= ======= ======== ============ ========== ========= ==========
See Notes to Consolidated Financial Statements. 7 MASSEY ENERGY COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Major Accounting Policies Basis of Presentation The accompanying consolidated financial statements include the accounts of Massey Energy Company ("Massey" or the "Company"), its wholly owned subsidiary A. T. Massey Coal Company, Inc. ("A. T. Massey") and its subsidiaries. A. T. Massey now represents the sole operating subsidiary of Massey, as Massey has no separate independent operations. Until the spin-off transaction on November 30, 2000 (the "Spin-Off") (See Note 9), A. T. Massey was 100% controlled by Fluor Corporation ("Fluor"). Therefore, these financial statements for all periods prior to 2001 may not necessarily be indicative of the results of operations, financial position and cash flows of Massey in the future or had it operated as a separate independent company. All significant intercompany transactions and accounts have been eliminated. Use of Estimates The preparation of the financial statements of the Company in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates. Cash and Cash Equivalents Securities with maturities of 90 days or less at the date of purchase are classified as cash equivalents. Revenue Recognition Coal sales are generally recognized when title passes to the customers. For domestic sales, this generally occurs when coal is loaded at the mine or at off-site storage locations. For export sales, this generally occurs when coal is loaded onto marine vessels at terminal locations. Other revenue generally consists of royalties, rentals, miscellaneous income and gains on the sale of non-strategic assets. For the years ended October 31, 2001, 2000, and 1999, the Company recorded gains on the sale of non-strategic reserves of $1.1 million, $26.5 million, and $10.2 million, respectively. Property, Plant and Equipment Property, plant and equipment is carried at cost and comprises:
At October 31, ----------------------- 2001 2000 ------------ ---------- (in thousands) Land, buildings and equipment............................ $ 1,652,017 $1,561,122 Mining properties and mineral rights..................... 596,280 582,512 Mine development......................................... 466,777 373,418 ------------ ---------- Total property, plant and equipment...................... 2,715,074 2,517,052 Less accumulated depreciation, depletion and amortization (1,101,941) (957,626) ------------ ---------- Net property, plant and equipment..................... $ 1,613,133 $1,559,426 ============ ==========
Expenditures that extend the useful lives of existing buildings and equipment are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. Coal exploration costs are expensed as incurred. Development costs applicable to the opening of new coal mines and certain mine expansion projects are capitalized. When properties are retired or otherwise disposed, the related cost and accumulated depreciation are removed from the respective accounts and any profit or loss on disposition is credited or charged to income. Depreciation of buildings, plant and equipment is calculated on the straight-line method over their estimated useful lives, which generally range from 15 to 30 years for building and plant, and 3 to 20 years for equipment. 8 Depletion of mining properties and mineral rights and amortization of mine development costs are computed using the units-of-production method over the estimated recoverable tons. Reclamation The Company accrues for post-mining reclamation costs, as coal is mined, on a unit-of-production basis over the estimated recoverable tons. Accrued reclamation costs are regularly reviewed by management and are revised for changes in future estimated costs and regulatory requirements. Reclamation of disturbed acreage is performed as a normal part of the mining process. Impairment of Long-Lived Assets Impairment of long-lived assets is recorded when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. The carrying value of the assets is then reduced to their estimated fair value which is usually measured based on an estimate of future discounted cash flows. During the third quarter of 2001, management decided to move a longwall to better mining conditions in another mining location. As a result, unamortized longwall panel development costs of $7.6 million were considered to be impaired and were written off. These charges are included in cost of sales. During the fourth quarter of 2000, due to poor and unsafe mining conditions, the Company abandoned certain longwall mining equipment and related longwall panel development costs. This resulted in a write-off of approximately $9 million, which is included in cost of sales. Advance Mining Royalties Leases which require minimum annual or advance payments and are recoverable from future production are generally deferred and charged to expense as the coal is subsequently produced. At October 31, 2001 and 2000, advance mining royalties included in other noncurrent assets totaled $29.8 and $27.5 million, respectively. Black Lung Benefits Coal mining subsidiaries are obligated to pay coal workers' pneumoconiosis (black lung) benefits to eligible recipients with respect to claims awarded on or after July 1, 1973. Charges are being made to operations based on annual evaluations prepared by the Company's independent actuaries. Income Taxes Deferred income taxes result from temporary differences between the tax bases of assets and liabilities and their financial reporting amounts. Earnings per Share Shares used to calculate basic earnings per share for the periods ended October 31, 2000 and 1999 is based on the number of shares outstanding immediately following the Spin-Off (see Note 9). The number of shares used to calculate basic loss per share for the period ended October 31, 2001 is based on the number of weighted average outstanding shares of Massey Energy during the period. Shares used to calculate diluted earnings per share for the periods ended October 31, 2000 and 1999 is based on the number of shares outstanding immediately following the Spin-Off and the dilutive effect of stock options and other stock-based instruments of Fluor Corporation, held by Massey employees, that were converted to equivalent instruments in Massey Energy Company in connection with the Spin-Off. In accordance with accounting principles generally accepted in the United States, the effect of dilutive securities was excluded from the calculation of the diluted loss per common share for the period ended October 31, 2001 as such inclusion would result in antidilution. 9 The computations for basic and diluted (loss) earnings per share are based on the following per share information:
At October 31, -------------------- 2001 2000 1999 ------ ------ ------ (in thousands) Weighted average shares of common stock outstanding:.............................. Basic.................................... 73,858 73,469 73,469 Effect of stock options/restricted stock. -- 3 7 ------ ------ ------ Diluted.................................. 73,858 73,472 73,476 ====== ====== ======
Inventories Purchased coal inventories are stated at the lower of cost, computed on the first-in, first-out method, or market value. Produced coal and supplies generally are stated at the lower of average cost or net realizable value. Inventories are comprised of the following:
At October 31, ----------------- 2001 2000 -------- -------- (in thousands) Coal. $117,915 $ 82,636 Other 23,568 21,496 -------- -------- $141,483 $104,132 ======== ========
Longwall Panel Costs The Company defers certain costs related to the development of longwall panels within a deep mine. These costs are amortized over the life of the panel once it is placed in service. Longwall panel lives range from approximately eight to twelve months. At October 31, 2001 and 2000, deferred longwall panel costs included in other current assets totaled $52.0 million and $24.6 million, respectively. Internal Use Software The Company capitalizes certain costs incurred in the development of internal-use software, including external direct material and service costs, and employee payroll and payroll-related costs in accordance with the American Institute of Certified Public Accountants' Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed for or Obtained for Internal Use." All costs capitalized are amortized using the straight-line method over the estimated useful life not to exceed 7 years. Concentrations of Credit Risk and Major Customers The Company is engaged in the production of high-quality low sulfur steam coal for the electric generating industry, as well as industrial customers and metallurgical coal for the steel industry. Steam coal sales accounted for approximately 54%, 50%, and 46% of consolidated net sales during 2001, 2000, and 1999, respectively. Metallurgical coal sales accounted for approximately 34%, 40%, and 45% of consolidated net sales during 2001, 2000, and 1999, respectively. Industrial coal sales during 2001, 2000, and 1999 were 12%, 10%, and 9% of consolidated net sales, respectively. Massey's mining operations are conducted in eastern Kentucky, West Virginia and Virginia and the coal is marketed primarily in the United States. 10 For the years ended October 31, 2001, 2000, and 1999, approximately 11%, 14%,and 12%, respectively, of net sales were made to one utility customer. At October 31, 2001, approximately 25%, 63% and 12% of consolidated trade receivables represent amounts due from metallurgical customers, utility customers and industrial customers, respectively, compared with 51%, 40% and 9%, respectively, as of October 31, 2000. Credit is extended based on an evaluation of the customer's financial condition and generally collateral is not required. Derivatives Effective November 1, 2000, the Company adopted Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") as amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities". The Statements require that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of these accounting standards and subsequent implementation guidance did not have a significant impact on the Company's financial position, results of operations, or liquidity. Stock Plans The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, compensation cost for stock options granted to employees is measured as the excess, if any, of the quoted market price of the stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation cost for stock appreciation rights and performance equity units is recorded based on the quoted market price of the Company's stock at the end of the period. Accounting Pronouncements On August 15, 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Accounting Standards No. 143, "Accounting for Asset Retirement Obligations". The standard will require that retirement obligations be recorded as a liability based on the present value of the estimated cash flows. This SFAS is effective for fiscal years beginning after June 15, 2002, and transition is by cumulative catch-up adjustment. The adoption of this accounting standard will take place during the Company's fiscal year 2003. The Company is currently evaluating the impact that the standard will have on its financial statements. Reclassifications Certain prior year amounts have been reclassified to conform to current year presentation. 2. Income Taxes Income tax (benefit) expense included in the consolidated statement of earnings is as follows:
Year Ended October 31, ------------------------- 2001 2000 1999 -------- ------- -------- (in thousands) Current: Federal............................ $(6,389) $13,735 $ 9,048 State and local.................... 148 1,447 (1,896) -------- ------- -------- Total current.................. (6,241) 15,182 7,152 -------- ------- -------- Deferred: Federal............................ (1,132) 24,719 36,912 State and local.................... (334) 3,509 5,497 -------- ------- -------- Total deferred................. (1,466) 28,228 42,409 -------- ------- -------- Total income tax (benefit) expense...................... $(7,707) $43,410 $ 49,561 ======== ======= ========
11 For the tax year ended October 31, 2001, Massey's consolidated federal income tax return includes the operations of A.T. Massey and Fluor until the date of the Spin-Off. A reconciliation of income tax (benefit) expense calculated at the federal statutory rate of 35% to the Company's income tax (benefit) expense on (loss) earnings is as follows:
Year Ended October 31, -------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) U.S. statutory federal tax expense.......... $(3,065) $ 42,775 $ 53,550 Increase (decrease) in taxes resulting from: State taxes.............................. 117 3,799 2,341 Items without tax effect................. 700 5,235 3,729 Depletion................................ (4,496) (7,657) (9,625) FSC exempt income........................ (963) (952) (1,242) Other, net............................... -- 210 808 -------- -------- -------- Total income tax (benefit) expense..... $(7,707) $ 43,410 $ 49,561 ======== ======== ========
Deferred taxes reflect the tax effects of differences between the amounts recorded as assets and liabilities for financial reporting purposes and the amounts recorded for income tax purposes. The tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows:
October 31, -------------------- 2001 2000 --------- --------- (in thousands) Deferred tax assets: Postretirement benefit obligations............. $ 28,422 $ 27,566 Worker's compensation.......................... 13,284 12,611 Reclamation and mine closure................... 32,416 34,123 Alternative minimum tax credit carryforwards... 59,549 59,549 Other.......................................... 35,246 30,339 --------- --------- 168,917 164,188 Valuation allowance for deferred tax assets......... (66,508) (65,085) --------- --------- Deferred tax assets, net............................ 102,409 99,103 --------- --------- Deferred tax liabilities: Plant, equipment and mine development.......... (187,136) (185,385) Mining property and mineral rights............. (110,748) (112,574) Other.......................................... (45,068) (46,768) --------- --------- Total deferred tax liabilities............... (342,952) (344,727) --------- --------- Net deferred tax liabilities........................ $(240,543) $(245,624) ========= =========
The Company's deferred tax assets include alternative minimum tax ("AMT") credits of $59.5 million each at October 31, 2001 and 2000. The AMT credits have no expiration date. Subsequent to the Spin-Off, the Company completed an assessment of its deferred tax balances and the liklihood of realizing AMT credit carryforwards as a stand-alone company. Management determined, more likely than not, that these credits will not be realized. Accordingly, the Company reclassified tax reserves at October 31, 2000 to reflect the full valuation allowance related to these credits. Massey's federal income tax returns have been examined by the Internal Revenue Service, or Statutes of Limitations have expired through 1997. Management believes that the Company has adequately provided for any income taxes and interest that may ultimately be paid with respect to all open tax years. 12 3. Retirement Benefits Prior to October 1, 2001, Massey sponsored two non-contributory defined benefit pension plans which covered substantially all administrative and non-union employees hired prior to September 1, 1994. As of October 1, 2001, these plans were merged together with each participant group retaining its benefit formula. These formulas provide pension benefits based on the employee's years of service and average annual compensation during the highest five consecutive years of service. In addition, the new merged plan covers substantially all administrative and non-union employees of the Company who were previously covered under a non-contributory defined contributory pension plan. These participants will accrue benefits under a third cash balance formula with contribution credits based on hours worked. Funding for the plan is generally at the minimum annual contribution level required by applicable regulations. The plans assets are held by an independent trustee and, in certain circumstances, by insurance carriers. The plans assets include cash and cash equivalents, corporate and government bonds, preferred and common stocks, investments in mutual funds and annuity contracts. The fair market value of the plans assets was $196 million at October 31, 2001. Net periodic pension income for the defined benefit pension plan includes the following components:
Year Ended October 31, ---------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) Service cost............................. $ 2,657 $ 2,509 $ 3,451 Interest cost............................ 9,498 9,114 8,987 Expected return on plan assets........... (22,245) (20,732) (18,281) Amortization of unrecognized net asset... (1,800) (2,116) (872) Amortization of prior service cost....... 57 56 56 -------- -------- -------- Net periodic pension income.............. $(11,833) $(11,169) $ (6,659) ======== ======== ========
The weighted average assumptions used in determining pension obligations are as follows:
At October 31, ------------- 2001 2000 ---- ---- Discount rate...................................... 7.25% 7.75% Rate of increase in compensation levels............ 4.00% 4.00% Expected long-term rate of return on plan assets... 9.50% 9.50%
The following table sets forth the change in benefit obligation, plan assets and funded status of the Company's defined benefit pension plan: 13 At October 31, ------------------- 2001 2000 --------- --------- (in thousands) Change in benefit obligation Benefit obligation at beginning of year........ $ 126,687 $ 123,865 Service cost................................... 2,657 2,509 Interest cost.................................. 9,498 9,114 Actuarial loss (gain).......................... 7,626 (3,262) Benefits paid.................................. (6,274) (5,539) --------- --------- Benefit obligation at end of year.......... $ 140,194 $ 126,687 ========= ========= Change in plan assets Fair value at beginning of year................ $ 237,551 $ 221,223 Actual return on assets........................ (35,156) 21,840 Company contributions.......................... 10 27 Benefits paid.................................. (6,274) (5,539) --------- --------- Fair value at end of year.................. $ 196,131 $ 237,551 ========= ========= Funded status..................................... $ 55,937 $ 110,864 Unrecognized net actuarial loss (gain)............ 20,743 (46,083) Unrecognized prior service cost................... 461 518 --------- --------- Pension assets.................................... 77,141 65,299 Amount included in current liabilities............ 3,259 2,441 --------- --------- Noncurrent asset.................................. $ 80,400 $ 67,740 ========= ========= Under labor contracts with the United Mine Workers of America Benefit Funds, certain operations make payments into two multi-employer defined benefit pension plan trusts established for the benefit of certain union employees. The contributions are based on tons of coal produced and hours worked. Such payments aggregated approximately $0.1 million each in 2001, 2000 and 1999. Under the Coal Industry Retiree Health Benefits Act of 1992, coal producers are required to fund medical and death benefits of certain retired union coal workers based on premiums assessed by the United Mine Workers of America. Based on available information at October 31, 2001, the Company's obligation (discounted at 7.25%) under the Act is estimated at approximately $52.3 million. The cost of the Company's obligation will be recognized as expense as payments are assessed. The Company expense related to this obligation for the years ended October 31, 2001, 2000, and 1999 totaled $5.0 million, $3.6 million, and $3.5 million, respectively. Certain union employees are covered by a non-contributory defined contribution pension plan. Contributions to the defined contribution retirement plan are based on hours worked. Until prior to October 1, 2001, the Company sponsored a separate non-contributory defined contribution pension plan for substantially all administrative and non-union employees, on September 30, 2001, the plan was frozen and assets were merged into an existing salary deferral and profit sharing plan. Employees covered under the frozen plan now participate in the defined benefit pension plan under the third formula discussed in the first paragraph of this Note. For certain employees, the Company sponsors a contributory defined contribution pension plan for eligible employees with Company contributions based on hours worked. Effective October 1, 2001, the salary deferral rate was increased from 10% to 15% of eligible compensation and the Company matches 30% on the first 10% of employee deferrals.The Company may make an additional discretionary contribution to the plan. For the years ended October 31, 2001, 2000, and 1999, Company contributions to these three plans aggregated approximately $7.5 million, $5.6 million, and $5.4 million, respectively. 14 The Company also sponsors a salary deferral and profit sharing plan covering substantially all administrative and non-union employees. Effective October 1, 2001, the salary deferral rate was increased from 10% to 15% of eligible compensation and the Company matches 30% on the first 10% of employee deferrals. The Company may make additional discretionary contributions to the plan. Total Company contributions aggregated approximately $2.5 million, $2.2 million, and $2.6 million, in 2001, 2000, and 1999, respectively. The Company also sponsors defined benefit health care plans that provide post-retirement medical benefits to eligible union and non-union members. To be eligible, retirees must meet certain age and service requirements. Depending on year of retirement, benefits may be subject to annual deductibles, coinsurance requirements, lifetime limits, and retiree contributions. Service costs are accrued currently. The accumulated postretirement benefit obligation at October 31, 2001 was determined in accordance with the current terms of the Company's health care plans, together with relevant actuarial assumptions and health care cost trend rates projected at an annual rate of 8.0 percent ranging down to 5.0 percent in 2007 (5.7% ranging down to 5.0% in 2002 at October 31, 2000), and remaining level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the medical plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage -------------- -------------- Point Increase Point Decrease -------------- -------------- (in thousands) Effect on total of service and interest costs components..... $ 1,990 $ (1,591) Effect on accumulated postretirement benefit obligation...... $15,435 $(12,498)
Net periodic postretirement benefit cost includes the following components:
Year Ended October 31, ---------------------- 2001 2000 1999 ------ ------ ------ (in thousands) Service cost............................... $3,426 $3,543 $3,850 Interest cost.............................. 5,333 4,611 4,092 Amortization of prior service cost......... 140 140 140 ------ ------ ------ Net periodic postretirement benefit cost... $8,899 $8,294 $8,082 ====== ====== ======
The following table sets forth the change in benefit obligation of the Company's postretirement benefit plans:
At October 31, ------------------- 2001 2000 --------- --------- (in thousands) Change in benefit obligation Benefit obligation at beginning of year........ $ 66,355 $ 58,203 Service cost................................... 3,426 3,543 Interest cost.................................. 5,333 4,611 Actuarial loss................................. 16,857 2,397 Benefits paid.................................. (2,405) (2,399) --------- --------- Benefit obligation at end of year.......... $ 89,566 $ 66,355 ========= ========= Funded status..................................... $(89,566) $(66,355) Unrecognized net actuarial loss (gain)............ 12,965 (3,892) Unrecognized prior service cost................... 1,496 1,636 --------- --------- Accrued postretirement benefit obligation......... (75,105) (68,611) Amount included in other current liabilities...... 3,044 2,659 --------- --------- Noncurrent liability....................... $(72,061) $(65,952) ========= =========
15 The discount rate used in determining the postretirement benefit obligation was 7.25 percent at October 31, 2001 and 7.75 percent at October 31, 2000. 4. Fair Value of Financial Instruments Certain Company subsidiaries provide loans to West Virginia businesses at prevailing interest rates as part of an economic development program that provides tax credits as incentives. Outstanding loans at October 31, 2001 and 2000 amounted to $10.5 million and $11.3 million, respectively, of which $2.4 million and $3.0 million, respectively, are unsecured. These loans are estimated to be at fair value, after recording an allowance for loan losses of $2.1 million at October 31, 2001 and $2.9 million at October 31, 2000, based on future cash flows and related credit risk. The current portion of these notes is included in trade and other accounts receivable. The noncurrent portion is included in other noncurrent assets. Prior to the Spin-Off (see Note 9), the Company loaned funds in excess of its operating and capital needs to Fluor and received interest on the average daily balance at 130% of the federal short-term rate determined in accordance with the Internal Revenue Code of 1986. Fluor repaid these loans to the Company as the need arose. The Company believed these financial practices to be a fair arrangement with its prior parent and concluded that any further assessment to determine fair market value of amounts due from Fluor would not be cost beneficial. Interest income for 2001, 2000, and 1999 related to these loans amounted to $1.5 million, $16.6 million and $11.7 million, respectively. These loans were classified as a reduction to shareholders' equity in the consolidated balance sheet as of October 31, 2000, and were settled as part of the Spin-Off transaction. Included in other noncurrent assets as of October 31, 2000, is $21.8 million of Fluor commercial paper acquired in the open market at prevailing interest rates. As of the Spin-Off, Massey ceased to have any investment in Fluor commercial paper. Interest income associated with the Fluor commercial paper was not material for the year ended October 31, 2001, and amounted to $1.6 million for the year ended October 31, 2000 and $1.1 million for the year ended October 31, 1999. The commercial paper is classified as an available-for-sale security, and is carried at cost, which approximates fair value. Unrealized gains or losses are insignificant. Due to restrictions on the use of the commercial paper, it has been classified as a noncurrent asset. In addition, the Company has outstanding $248.2 million of short-term debt at October 31, 2001 (see Note 10). The carrying amount of this debt approximates its fair value. The Company's long-term debt consists entirely of 6.95 percent Senior Notes due March 1, 2007 (see Note 10). The fair value of the Senior Notes at October 31, 2001, based on currently available market information, was $305.9 million. 5. Other Noncurrent Liabilities Other noncurrent liabilities comprise the following:
At October 31, ----------------- 2001 2000 -------- -------- (in thousands) Black lung obligation..................... $ 53,596 $ 24,033 Reclamation............................... 107,448 111,101 Other post-employment benefits (Note 3)... 72,061 65,952 Workers' compensation..................... 19,784 24,429 Other..................................... 55,141 32,092 -------- -------- $308,030 $257,607 ======== ========
16 Coal mining companies are subject to the Federal Coal Mine Health and Safety Act of 1969, as amended, and various states' statutes for the payment of medical and disability benefits to eligible recipients related to coal worker's pneumoconiosis (black lung). The Company provides for these claims principally through a self-insurance program. Trusteed assets available for idled company benefits of approximately $2.4 million and $29.8 million are applied to reduce the balance sheet amount of black lung obligations at October 31, 2001 and 2000, respectively. Charges are made to operations based on annual evaluation prepared by the Company's independent actuaries. The expense for 2001, 2000 and 1999, respectively, was determined using a discount rate of 7.75%. Black lung expense includes the following components:
Year Ended October 31, ------------------------ 2001 2000 1999 ------ -------- -------- (in thousands) Service cost..................... $(316) $ 950 $ 767 Interest cost.................... 2,137 2,344 1,960 Amortization of actuarial gain... -- (3,492) (1,163) Interest on actuarial gain....... -- (270) (314) ------ -------- -------- Total black lung expense...... $1,821 $ (468) $ 1,250 ====== ======== ========
Under the Federal Surface Mining Control and Reclamation Act of 1977 and similar state statutes, mine property is required to be restored in accordance with regulated standards. The Company performs a certain amount of required reclamation of disturbed acreage as an integral part of its normal mining process. All such costs are expensed as incurred. Reclamation costs to be incurred upon final mine closure are estimated and accrued as mining progresses over the estimated useful mining life of the property. The costs relate to reclaiming the pit and support acreage of surface mines and sealing portals of deep mines. Other costs common to both types of mining are related to reclaiming refuse and slurry ponds. The establishment of the reclamation liability is based on permit requirements and requires various estimates and assumptions, principally associated with costs and productivities. For the years ended October 31, 2001, 2000, and 1999, the Company accrued approximately $7 million, $5 million, and $6 million, respectively, towards final mine closure reclamation, excluding reclamation recosting adjustments identified below. The Company reviews its entire environmental liability annually and makes necessary adjustments, including permit changes and revisions to costs and productivities to reflect current experience. These recosting adjustments are recorded as a decrease in cost of sales and totaled $7.0 million, $4.2 million and $0.8 million for the years ended October 31, 2001, 2000, and 1999, respectively. The Company's management believes it is making adequate provision for all expected future reclamation costs. Final reclamation costs for all operations as of October 31, 2001 are estimated to be approximately $153 million. 6. Stock Plans Massey's executive stock plans provide for grants of non-qualified or incentive stock options, restricted stock awards and stock appreciation rights ("SARS"). All executive stock plans are administered by the Compensation Committee of the Board of Directors (the "Committee") comprised of outside directors. Option grant prices are determined by the Committee and are established at the fair value of the Company's common stock at the date of grant. Options and SARS normally extend for 10 years and become exercisable over a vesting period determined by the Committee, which can include accelerated vesting for achievement of performance or stock price objectives. Stock based grants (restricted shares, stock options and SARS as discussed herein) awarded to employees of the Company prior to the Spin-Off, were generally converted to equivalent instruments in Massey following its separation from Fluor. In this regard, the outstanding number of grants were increased by multiplying the applicable amount by 4.056 (the "Conversion Ratio"). Similarly, where applicable, the exercise price was reduced by dividing the exercise price prior to the Spin-Off by the Conversion Ratio. 17 During 2001 the Company issued 875,961 nonqualified stock options that vest over four years and expire in ten years. During 2000 and 1999, prior to the Spin-Off, 290,080 and 113,860 options (in Fluor stock), respectively, were awarded to Massey employees. The 2000 awards cliff vest after four years and expire in ten years, with accelerated vesting provisions based on the price of Massey's stock. The accelerated vesting provisions were achieved during the first quarter of 2001. The 1999 awards vest over four years and expire in ten years. No grants of SARS were made to Massey employees during the period 1999 through 2001. Restricted stock awards issued under the plans provide that shares awarded may not be sold or otherwise transferred until restrictions have lapsed or performance objectives have been attained. Upon termination of employment, shares upon which restrictions have not lapsed must be returned to the Company. Restricted stock issued under the plans totaled 266,411 shares in 2001. Prior to the Spin-Off, Fluor Corporation restricted stock issued to Massey employees totaled 31,390 shares in 2000 (117,618 shares when applying the Spin-Off conversion ratios at date of grant), and 42,647 shares in 1999 (98,946 shares when applying the Spin-Off conversion ratios at date of grant). As permitted by Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company has elected to continue following the guidance of APB Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. For the fiscal years ended October 31, 2001, 2000 and 1999, expenses related to Massey's various stock compensation plans totaled $5.8 million, $3.8 million and $6.3 million, respectively. Under APB Opinion No. 25, no compensation cost is recognized for the option plans where vesting provisions are based only on the passage of time. Had the Company recorded compensation expense using the accounting method recommended by SFAS No. 123, net earnings and diluted earnings per share would have been reduced to the pro forma amounts as follows:
Year ended October 31, 2001 2000 1999 ------------------------------------------------------------------ (in thousands, except per share amounts) Net (loss) earnings As reported......................... ($1,050) $78,804 $103,440 Pro forma........................... ($2,425) $77,204 $102,670 Diluted net (loss) earnings per share As reported......................... ($ 0.01) $ 1.07 $ 1.41 Pro forma........................... ($ 0.03) $ 1.05 $ 1.40
The estimated fair value as of the date of grant for options granted to Massey employees in 2001, 2000 and 1999 was determined using the Black-Scholes option-pricing model based on the following weighted average assumptions (assumptions applied in 2000 and 1999 were determined by Fluor):
2001 2000 1999 ---- ---- ---- Expected option lives (years) 5 6 6 Risk-free interest rates..... 4.29% 6.03% 4.43% Expected dividend yield...... 0.81% 1.74% 1.37% Expected volatility.......... 37.1% 39.8% 33.4%
The weighted average fair value of options granted by the Company during 2001 was $7.22. The weighted average fair value of options granted by Fluor to Massey employees during 2000 and 1999 was $18.00 and $15.06, respectively (prior to conversion). 18 The following table summarizes stock option activity:
Weighted Average ------------------------ Stock Exercise Price Options Per Share -------------------------------------------------------------------- Outstanding at October 31, 1998............ 335,816 $ 49.24 -------------------------------------------------------------------- Granted.................................... 113,860 $ 42.88 Expired or Cancelled....................... (6,950) $ 56.77 Exercised.................................. (980) $ 35.09 -------------------------------------------------------------------- Outstanding at October 31, 1999............ 441,746 $ 47.51 -------------------------------------------------------------------- Granted.................................... 290,080 $ 44.31 Expired or Cancelled....................... (52,010) $ 48.61 Exercised.................................. (6,755) $ 35.09 -------------------------------------------------------------------- Outstanding at October 31, 2000............ 673,061 $ 47.16 -------------------------------------------------------------------- Conversion adjustment to shares at Spin-Off 1,960,581 Granted.................................... 875,961 $ 19.78 Expired or Cancelled....................... (375,486) $ 12.12 Exercised ................................. (817,110) $ 11.47 -------------------------------------------------------------------- Outstanding at October 31, 2001............ 2,317,007 $ 14.89 Exercisable at: October 31, 1999 (pre-conversion shares)... 227,827 October 31, 2000 (pre-conversion shares)... 257,850 October 31, 2001........................... 1,243,903
Characteristics of outstanding stock options at October 31, 2001 are as follows:
Outstanding Options Exercisable Options ---------------------------- ------------------- Weighted Weighted Weighted Average Average Average Remaining Exercise Exercise Range of Exercise Price Shares Life Price Shares Price ------------------------------------------------------------------------ $ 8.65 - 10.93..... 977,140 7.4 $10.52 846,336 $10.51 $12.50 - 13.03..... 178,814 5.6 $12.75 109,709 $12.68 $14.56 - 18.86..... 287,858 4.3 $16.17 287,858 $16.17 $19.42 - 20.11..... 873,195 9.9 $19.78 -- -- --------- --------- $ 8.65 - 20.11..... 2,317,007 7.8 $14.89 1,243,903 $12.01 ========= === ====== ========= ======
At October 31, 2001, there are 5,320,765 shares available for future grant under the Company's stock plans. Available for grant includes shares which may be granted as either stock options or restricted stock, as determined by the Committee under the Company's various stock plans. 7. Lease Obligations Certain mining and other equipment is leased under operating leases. Certain of these leases provide options for the purchase of the property at the end of the initial lease term, generally at its then fair market value, or to extend the terms at its then fair rental value. Rental expense for the years ended October 31, 2001, 2000, and 1999 was $54.3 million, $28.4 million, and $22.0 million, respectively. 19 The following presents future minimum rental payments, by year, required under operating leases with initial terms greater than one year, in effect at October 31, 2001:
Minimum Rentals (in thousands) Year -------------- 2002...... $ 51,922 2003...... 47,354 2004...... 43,849 2005...... 39,968 2006...... 26,546 Thereafter 7,748 -------- $217,387 ========
8. Contingencies and Commitments The Company is the subject of, or a party to, various suits and pending or threatened litigation involving governmental agencies or private interests. Also, the Company's operations are affected by federal, state and local laws and regulations regarding environmental matters and other aspects of its business. On October 20, 1999, the U.S. District Court for the Southern District of West Virginia issued an injunction which prohibits the construction of valley fills over both intermittent and perennial stream segments as part of mining operations. While the Company is not a party to this litigation, virtually all mining operations, including Massey, utilize valley fills to dispose of excess materials. On April 24, 2001, the Fourth Circuit Court of Appeals overruled the district court, finding that the 11/th/ Amendment to the U.S. Constitution barred the suit against WVDEP in Federal Court. On July 13, 2001, the Fourth Circuit Court of Appeals denied the plaintiffs' petition for rehearing. In October 2001, the plaintiffs appealed the Fourth Circuit decision to the U.S. Supreme Court. On January 22, 2002, the U.S. Supreme Court refused to hear the appeal. Accordingly, challenges to WVDEP's enforcement of its mining program cannot be maintained in federal court. However, challenges may be raised in state court against WVDEP or in federal court against the federal Office of Surface Mining ("OSM"), the agency that oversees state regulation of surface mining. If and to the extent state courts rule that the WVDEP is prohibited from issuing permits for the construction of valley fills or federal courts rule that OSM is compelled to impose such a prohibition on WVDEP, all or a portion of Massey's mining operations could be affected if legislation is not passed which limits the impact of such a ruling. Harman Mining Corporation and certain of its affiliates (collectively "Harman") filed a breach of contract actions against Wellmore Coal Corporation, a former Massey subsidiary, in Buchanan County, Virginia Circuit Court. On August 24, 2000, as part of the damages phase of the trial, a jury awarded damages in the amount of $6 million. Massey's subsidiary, Knox Creek Coal Corporation, has assumed the defense of this action under the terms of the stock purchase agreement by which it sold the stock of Wellmore and, on August 6, 2001 filed a petition for appeal of the adverse determination on liability and damages to the Supreme Court of Virginia. On October 11, 2000, a partial failure of Martin County Coal Corporation's coal refuse impoundment released approximately 230 million gallons of coal slurry into adjacent underground mine workings. The slurry then discharged into two tributary streams of the Big Sandy River in eastern Kentucky. No one was injured in the discharge. Clean up efforts began immediately and are largely complete. The States of Kentucky and West Virginia have issued various notices of violation related to the discharge and ordered remedial measures. Fines and penalties, which may not be covered by insurance, have not yet been assessed. The Company has begun informal discussions with various agencies with respect to the resolution of the notices of violation, including potential fines and penalties. Several lawsuits have been brought by downstream residents and other individual plaintiffs claiming to be damaged by the spill. These suits assert trespass, property damage, nuisance and other claims, and seek compensatory and punitive damages. Certain of these suits seek to be certified as class action lawsuits. These lawsuits remain in their initial stages. 20 Martin County Coal is continuing to seek approval from the applicable agencies for alternate refuse disposal options related to operations of Martin County Coal's preparation plant. The Company recorded a $3 million charge in the fourth quarter of 2000 relating to the slurry spill. The charge represents an accrual of $46.5 million in estimated spill-related clean-up costs and liabilities net of $43.5 million in probable insurance recoveries. In the consolidated balance sheet as of October 31, 2001 and 2000, the environmental accruals of $11.5 million and $46.5 million, respectively, are included in other current liabilities and probable insurance recoveries of $20.5 million and $43.5 million, respectively, are included in trade and other accounts receivable. Massey continues to seek insurance reimbursement of any and all covered costs. Although the remediation efforts are largely complete, the degree of uncertainty with respect to potential claims, fines and penalties make it reasonably possible that the Company's estimates with respect to the slurry spill could change. The outcome or timing of current legal or environmental matters or the impact, if any, of pending legislation or regulatory developments (including the matters noted above) on future operations is not currently estimable. However, management does not currently anticipate that such activity will result in amounts which in the aggregate would have a material effect on the Company's consolidated financial position. 9. Spin-Off Transaction On November 30, 2000, Fluor Corporation ("Fluor") completed a reverse spin-off, which divided it into two separate publicly-traded corporations. As a result of the reverse spin-off (the "Spin-Off"), Fluor separated into (i) the spun-off corporation, "new" Fluor Corporation ("New Fluor"), which owns all of Fluor's then existing businesses except for the coal-related business conducted by A. T. Massey Coal Company, Inc. ("A.T. Massey"), and (ii) Fluor Corporation, subsequently renamed Massey Energy Company, which owns the coal-related business. Further discussion of the Spin-Off may be found in Massey's Annual Report on Form 10-K for the fiscal year ended October 31, 2000 as filed with the Securities and Exchange Commission. Immediately after the Spin-Off, Massey had 73,468,707 shares of $0.625 par value common stock outstanding. In connection with the Spin-Off, A. T. Massey became the sole direct, and wholly owned subsidiary of Massey. Due to the relative significance of the businesses transferred to New Fluor following the Spin-Off, New Fluor has been treated as the "accounting successor" for financial reporting purposes, and the Company has been treated by New Fluor as a discontinued operation despite the legal form of separation resulting from the Spin-Off. As a result of the Spin-Off, the following occurred which affected Massey's ongoing operations: . Massey no longer invests in Fluor commercial paper; . Massey no longer loans amounts in excess of operating and capital needs to Fluor and the amounts due from Fluor were repaid as part of the Spin-Off; . Fluor's previously issued $300 million of 6.95 percent Senior Notes due March 1, 2007, with interest payable semi-annually on March 1 and September 1 of each year, became the obligation of Massey; and . Massey issued $275 million of its own commercial paper and utilized $3.5 million of cash to refund the $278.5 million of Fluor commercial paper assumed as a result of the Spin-Off. Massey's equity structure was also impacted as a result of the Spin-Off. As noted above, Massey assumed from Fluor $300 million of 6.95 percent Senior Notes, $278.5 million of Fluor commercial paper, other equity contributions from Fluor, and assumed Fluor's common stock equity structure. 21 10. Debt The Company's outstanding short-term debt at October 31, 2001 consists of $240.4 million of consolidated commercial paper and a note payable due November 1, 2001, of $7.8 million. The weighted average maturity of the commercial paper was 14.7 days at October 31, 2001. The weighted average effective interest rate of the outstanding commercial paper was 3.03 percent at October 31, 2001. Massey has $150 million 364-day and $250 million 3-year revolving credit facilities, which have been guaranteed by A. T. Massey, that serve to provide liquidity backstop to Massey's commercial paper program and are also available to meet the Company's ongoing liquidity needs. Borrowings under these facilities bear interest based on (i) the London Interbank Offer Rate (LIBOR) plus a margin, which is based on the Company's credit rating as determined by Moody's and Standard & Poor's, (ii) the Base Rate (as defined in the facility agreements) and (iii) the Competitive Bid Rate (as defined in the facility agreements). There were no borrowings outstanding under these facilities at October 31, 2001. The revolving credit facilities contain financial covenants requiring the Company to maintain various financial ratios. Failure by the Company to comply with these covenants could result in an event of default, which if not cured or waived could have a material adverse effect on the Company. The financial covenants were amended as of October 31, 2001, for the periods ending October 31, 2001, through March 31, 2002. The Company was in compliance with these amended covenants at October 31, 2001. The Company expects that it was not in compliance with the amended covenant related to debt to EBITDA at December 31, 2001, however, the participant banks have granted a temporary waiver of this financial covenant. The waiver expires on February 22, 2002. The Company is seeking to obtain an amendment to the covenant level prior to the expiration of the waiver and expects approval by the bank participants. If the Company is unable to obtain an amendment to the covenant level, it would most likely result in the Company seeking alternate sources of short-term financing, or issuing longer term debt, which the Company has available through a $500 million debt shelf registration originally filed with the Securities and Exchange Commission by Fluor Corporation in March 1999. As a result of the Spin-Off (see Note 9), the Company assumed from Fluor $300 million of previously issued 6.95 percent Senior Notes (the "Notes") due March 1, 2007. The Notes were issued in March 1997 and were sold at a discount for an aggregate price of $296.7 million. Interest is payable semiannually on March 1 and September 1 of each year, commencing September 1, 1997. The Notes are redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to the greater of (i) 100 percent of the principal amount of the Notes or (ii) as determined by a Quotation Agent as defined in the offering prospectus. Total interest paid for the period ended October 31, 2001, was $34.8 million and was not material for the periods ended October 31, 2000 and 1999. 11. Appalachian Synfuel, LLC On March 15, 2001, the Company sold a substantial interest in its synfuel producing subsidiary, Appalachian Synfuel, LLC, contingent upon a favorable Internal Revenue Service ruling, which was received in September 2001. The Company received cash of $3.6 million, a recourse promissory note for $15.2 million that will be paid in quarterly installments of $765,000 including interest, and a contingent promissory note that is paid on a cents per Section 29 credit dollar earned based on synfuel tonnage shipped. A deferred gain of $11.9 million as of October 31, 2001, is included in other noncurrent liabilities to be recognized ratably through 2007. The Company will continue to manage the facility under an operating agreement. 22 12. Quarterly Information (Unaudited)
Three Months Ended ------------------------------------------- January 31, April 30, July 31, October 31, 2001 2001(1) 2001(2) 2001 ----------- --------- --------- ----------- (in thousands, except per share amounts) Net sales.................... $273,112 $307,893 $ 301,792 $320,488 Income (loss) from operations 3,590 8,367 (5,738) 10,491 Earnings (loss) before taxes. (2,216) 3,249 (13,622) 3,832 Net earnings (loss).......... (1,352) 2,081 (9,394) 7,615 Earnings (loss) per share: Basic and diluted......... $ (0.02) $ 0.03 $ (0.13) $ 0.10 ======== ======== ========= ========
(1) On March 15, 2001, the Company sold a substantial interest in its synfuel producing subsidiary, Appalachian Synfuel, LLC. See Note 11 for further information. Additionally, earnings for the second quarter 2001 include a reduction in cost of sales of $6.5 million pretax and interest income of $3.2 million pretax related to the refund of black lung excise taxes. (2) Loss for the third quarter 2001 includes a $7.5 million pretax adjustment related to the write-off of unamortized longwall panel development costs. The Company decided in the third quarter to move the longwall unit to another mine to take advantage of better mining conditions. Additionally, the loss includes a reduction of cost of sales of $3.0 million pretax related to the refund of black lung excise taxes.
Three Months Ended ------------------ January 31, April 30, July 31, October 31, 2000 2000 2000 (3) 2000 (4) ----------- --------- -------- ----------- (in thousands, except per share amounts Net sales................ $259,074 $260,540 $272,847 $288,566 Income from operations... 29,719 28,179 37,723 1,279 Earnings before taxes.... 34,421 32,377 48,399 7,017 Net earnings............. 23,853 20,857 32,365 1,729 Earnings per share: Basic and diluted... $ 0.32 $ 0.28 $ 0.44 $ 0.02 ======== ======== ======== ========
(3) Earnings for the third quarter 2000 include a $12.0 million pretax reduction to cost of sales and $5.3 million pretax in interest income related to the refund of black lung excise taxes. (4) Earnings for the fourth quarter 2000 include a $3 million pretax reduction to cost of sales related to the refund of black lung excise taxes. Additionally, fourth quarter 2000 results include a bad debt expense charge of $7.1 million pretax related to the bankruptcy of a major steel customer. 13. Subsequent Events In December 2001, a substantial customer, Enron Corporation, filed for bankruptcy protection. As a result, the Company increased its reserve to $7.5 million in December 2001 related to its exposure to this customer. The West Virginia Workers Compensation Division filed suits in April 1998 against several coal companies, including several subsidiaries of Massey, for delinquent workers' compensation premiums from the 1980s and early 1990s owed by former contractors and licensees of such coal companies. In late 1999, the West Virginia Workers Compensation Division agreed to dismiss these lawsuits. In early 2001, the Affiliated Construction Trades Council filed a complaint in the Circuit Court of McDowell County, West Virginia seeking to reinstate 23 these lawsuits. By opinion dated October 23, 2001, the court held that the cases could be reinstated. In December 2001, in lieu of potentially reinstating the lawsuits, the State of West Virginia and several coal operators, including Massey, began discussions regarding a settlement of potential claims. In January 2002, Massey agreed to settle such claims for $6.9 million in exchange for a release of all such claims. On January 2, 2002, WVDEP entered an order finding a pattern of violations and suspending Green Valley's above-referenced refuse area permits for three days. Green Valley obtained a stay of enforcement of the order pending appeal and filed an appeal of the order. On January 14, 2002, WVDEP entered an order finding a pattern of violations and suspending operations on Marfork's refuse impoundment permit for fourteen days. Marfork obtained a stay of enforcement of the order pending appeal and filed an appeal of the order. 24 Part IV Item 14. Exhibits, Financial Statements and Reports on Form 8-K. (a) Documents filed as part of this report: 1. Financial Reports: Consolidated Statement of Earnings for the Fiscal Year Ended October 31, 2001, 2000 and 1999 Consolidated Balance Sheet at October 31, 2001 and October 31, 2000 Consolidated Statement of Cash Flows for the Fiscal Year Ended October 31, 2001, 2000 and 1999 Consolidated Statement of Shareholders' Equity for the Fiscal Year Ended October 31, 2001, 2000 and 1999 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: All schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. 25 3. Exhibits: Exhibit No. Description ----------- ----------- 23 Consent of Independent Auditors 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this Amendment No. 1 to be signed on its behalf by the undersigned, thereunto duly authorized. MASSEY ENERGY COMPANY February 28, 2002 By: /s/ J.M. Jarosinski ------------------------------- J.M. Jarosinski Vice President - Finance and Chief Financial Officer 27 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 23 Consent of Independent Auditors 28