Attached files
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 March 31, 2010
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
April 23, 2010, there were 102,963,574 shares of common stock, $0.625 par value,
outstanding.
1
MASSEY
ENERGY COMPANY
FORM
10-Q
For
the Quarterly Period Ended March 31, 2010
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
|
31
|
Item
4. Controls and Procedures
|
31
|
PART II: OTHER
INFORMATION
|
|
Item
1. Legal Proceedings
|
32
|
Item
1A. Risk Factors
|
32
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
35
|
Item
6. Exhibits
|
36
|
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 March 31,
|
||||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Produced
coal revenue
|
$ | 571,802 | $ | 681,027 | ||||
Freight
and handling revenue
|
74,289 | 57,782 | ||||||
Purchased
coal revenue
|
19,465 | 9,940 | ||||||
Other
revenue
|
23,083 | 19,339 | ||||||
Total
revenues
|
688,639 | 768,088 | ||||||
Costs
and expenses
|
||||||||
Cost
of produced coal revenue
|
469,936 | 545,925 | ||||||
Freight
and handling costs
|
74,289 | 57,782 | ||||||
Cost
of purchased coal revenue
|
20,623 | 5,206 | ||||||
Depreciation,
depletion and amortization, applicable to:
|
||||||||
Cost
of produced coal revenue
|
64,207 | 71,618 | ||||||
Selling,
general and administrative
|
262 | 1,021 | ||||||
Selling,
general and administrative
|
28,109 | 21,870 | ||||||
Other
expense
|
871 | 783 | ||||||
Gain
on derivative instruments
|
(36,453 | ) | (8,867 | ) | ||||
Total
costs and expenses
|
621,844 | 695,338 | ||||||
Income
before interest and taxes
|
66,795 | 72,750 | ||||||
Interest
income
|
1,463 | 8,877 | ||||||
Interest
expense
|
(25,216 | ) | (25,236 | ) | ||||
Gain
on short-term investment
|
3,780 | - | ||||||
Income
before taxes
|
46,822 | 56,391 | ||||||
Income
tax expense
|
(13,196 | ) | (12,965 | ) | ||||
Net
income
|
$ | 33,626 | $ | 43,426 | ||||
Net
income per share
|
||||||||
Basic
|
$ | 0.39 | $ | 0.51 | ||||
Diluted
|
$ | 0.39 | $ | 0.51 | ||||
Shares
used to calculate income per share
|
||||||||
Basic
|
86,137 | 84,859 | ||||||
Diluted
|
87,393 | 85,182 | ||||||
Dividends
per share
|
$ | 0.06 | $ | 0.06 |
See Notes
to Condensed Consolidated Financial Statements
3
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||
(In
Thousands, Except Share Amounts)
|
||||||||
UNAUDITED
|
||||||||
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 1,162,937 | $ | 665,762 | ||||
Short-term
investment
|
- | 10,864 | ||||||
Trade
and other accounts receivable, less allowance of $1,303
|
212,005 | 121,577 | ||||||
Inventories
|
273,682 | 269,826 | ||||||
Income
taxes receivable
|
2,815 | 10,546 | ||||||
Other
current assets
|
179,905 | 235,990 | ||||||
Total
current assets
|
1,831,344 | 1,314,565 | ||||||
Property,
plant and equipment, net
|
2,342,499 | 2,344,770 | ||||||
Other
noncurrent assets
|
162,986 | 140,336 | ||||||
Total
assets
|
$ | 4,336,829 | $ | 3,799,671 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts payable, principally trade
and bank overdrafts
|
$ | 185,069 | $ | 164,979 | ||||
Short-term debt
|
3,855 | 23,531 | ||||||
Payroll
and employee benefits
|
62,365 | 63,590 | ||||||
Other
current liabilities
|
206,308 | 192,835 | ||||||
Total
current liabilities
|
457,597 | 444,935 | ||||||
Noncurrent
liabilities
|
||||||||
Long-term debt
|
1,297,913 | 1,295,555 | ||||||
Deferred income
taxes
|
215,783 | 209,230 | ||||||
Pension
obligation
|
53,547 | 55,610 | ||||||
Other
noncurrent liabilities
|
542,963 | 538,058 | ||||||
Total
noncurrent liabilities
|
2,110,206 | 2,098,453 | ||||||
Total
liabilities
|
2,567,803 | 2,543,388 | ||||||
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
|
||||||||
96,454,056 and 86,213,582 shares,
respectively
|
60,273 | 53,868 | ||||||
Additional capital
|
1,044,173 | 568,995 | ||||||
Retained earnings
|
744,548 | 716,089 | ||||||
Accumulated other comprehensive
loss
|
(79,968 | ) | (82,669 | ) | ||||
Total
shareholders’ equity
|
1,769,026 | 1,256,283 | ||||||
Total
liabilities and shareholders’ equity
|
$ | 4,336,829 | $ | 3,799,671 |
See Notes
to Condensed Consolidated Financial Statements
4
MASSEY
ENERGY COMPANY
|
||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
(In
Thousands)
|
||||||||
UNAUDITED
|
||||||||
Three
Months Ended March 31,
|
||||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income
|
$ | 33,626 | $ | 43,426 | ||||
Adjustments
to reconcile Net income to Cash provided by operating
|
||||||||
activities:
|
||||||||
Depreciation,
depletion and amortization
|
64,469 | 72,639 | ||||||
Share-based
compensation expense
|
2,709 | 3,290 | ||||||
Amortization
of bond discount
|
5,013 | 4,713 | ||||||
Deferred
income taxes
|
3,089 | 3,129 | ||||||
Gain
on disposal of assets
|
(1,019 | ) | (9,318 | ) | ||||
Gain
on reserve exchange
|
(2,313 | ) | - | |||||
Gain
on insurance recovery
|
(5,810 | ) | - | |||||
Net
change in fair value of derivative instruments
|
(28,017 | ) | (20,688 | ) | ||||
Realized
gain on short-term investment
|
(3,780 | ) | - | |||||
Asset
retirement obligations accretion
|
4,131 | 3,502 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Increase
in accounts receivable
|
(93,743 | ) | (61,086 | ) | ||||
Increase
in inventories
|
(3,856 | ) | (22,893 | ) | ||||
Decrease
in other current assets
|
66,572 | 11,157 | ||||||
(Increase)
decrease in other assets
|
(9,204 | ) | 11,238 | |||||
Increase
(decrease) in accounts payable and bank overdrafts
|
20,090 | (41,956 | ) | |||||
Increase
in accrued income taxes
|
9,468 | 9,835 | ||||||
Increase
in other accrued liabilities
|
12,685 | 25,395 | ||||||
Increase
in other noncurrent liabilities
|
2,708 | 3,007 | ||||||
Increase
in pension obligation
|
1,429 | 6,442 | ||||||
Asset
retirement obligations payments
|
(1,090 | ) | (950 | ) | ||||
Cash
provided by operating activities
|
77,157 | 40,882 | ||||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Capital
expenditures
|
(56,146 | ) | (103,704 | ) | ||||
Proceeds
from redemption of short-term investment
|
14,644 | 14,470 | ||||||
Proceeds
from sale of assets
|
1,019 | 13,635 | ||||||
Proceeds
from insurance recovery
|
9,125 | - | ||||||
Cash
utilized by investing activities
|
(31,358 | ) | (75,599 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Issuance
of common stock
|
466,759 | - | ||||||
Repayments
of capital lease obligations
|
(382 | ) | (471 | ) | ||||
Repayment
for 6.625% senior notes
|
(21,949 | ) | - | |||||
Cash
dividends paid
|
(5,167 | ) | (5,092 | ) | ||||
Proceeds
from stock options exercised
|
11,490 | - | ||||||
Income
tax benefit from stock option exercises
|
625 | - | ||||||
Cash
provided (utilized) by financing activities
|
451,376 | (5,563 | ) | |||||
Increase
(decrease) in cash and cash equivalents
|
497,175 | (40,280 | ) | |||||
Cash
and cash equivalents at beginning of period
|
665,762 | 606,997 | ||||||
Cash
and cash equivalents at end of period
|
$ | 1,162,937 | $ | 566,717 |
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,
2009. Accounting measurements at interim dates inherently involve
greater reliance on estimates than at year-end. The results of
operations for the quarterly period ended March 31, 2010 are not necessarily
indicative of results that can be expected for the fiscal year ending December
31, 2010.
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 March 31, 2010, our consolidated results of
operations for the three months ended March 31, 2010 and 2009, and cash flows
for the three months ended March 31, 2010 and 2009, 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 6.875% 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 6.875% 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.
We have
evaluated subsequent events through the date the financial statements were
issued.
In
January 2010, the FASB issued an accounting standard update, amending disclosure
requirements related to Fair Value Measurements and Disclosures, as
follows:
1.
|
Significant
transfers between Level 1 and 2 shall be disclosed separately, including
the reasons for the transfers; and
|
2.
|
Information
about purchases, sales, issuances and settlements shall be disclosed
separately in the reconciliation of activity in Level 3 fair value
measurements.
|
This
accounting standard update is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlements in the reconciliation of activity in Level 3
fair value measurements, which are effective for interim and annual reporting
periods beginning after December 15, 2010. The adoption of this accounting
standard update did not have a material impact on our financial position or
results of operations. See Note 13 to the Notes to Condensed
Consolidated Financial Statements for more information on our Fair Value
Measurements and Disclosures.
6
In April
2010, the FASB issued an accounting standard update, amending disclosure
requirements related to income taxes, as a result of the Patient Protection and
Affordable Care Act (“PPACA”), which became law on March 23, 2010, and was
subsequently amended on March 30, 2010. Beginning in fiscal year
2014, the tax deduction available to us will be reduced to the extent our drug
expenses are reimbursed under the Medicare Part D retiree drug subsidy
program. Because retiree health care liabilities and the related tax
impacts are already reflected in our Condensed Consolidated Financial
Statements, we are required to recognize the full accounting impact of this
accounting standard update in the period in which the PPACA was signed into
law. The total non-cash charge to Income tax expense related to the
reduction in the tax benefit is $2.6 million, recorded in the first quarter of
2010.
(2) Inventories
Inventories
consisted of the following:
March 31, | December 31, | |||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Saleable
coal
|
$ | 180,848 | $ | 179,081 | ||||
Raw
coal
|
40,936 | 36,254 | ||||||
Coal
inventory
|
221,784 | 215,335 | ||||||
Supplies
inventory
|
51,898 | 54,491 | ||||||
Total
inventory
|
$ | 273,682 | $ | 269,826 |
Saleable
coal represents coal ready for sale, including inventories designated for
customer facilities under consignment arrangements of $29.5 million and $43.7
million at March 31, 2010 and December 31, 2009, respectively. Raw
coal represents coal that generally requires further processing prior to
shipment to the customer.
(3) Other
Current Assets
Other
current assets are comprised of the following:
March 31, | December 31, | |||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Longwall
panel costs
|
$ | 5,369 | $ | 12,041 | ||||
Deposits
|
71,676 | 133,794 | ||||||
Other
|
102,860 | 90,155 | ||||||
Total
other current assets
|
$ | 179,905 | $ | 235,990 |
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
March 31, 2010 and December 31, 2009, Deposits includes $46.0 million of funds
pledged as collateral to support $45.1 million of outstanding letters of
credit. In addition, Deposits at March 31, 2010 and December 31,
2009, includes $10.9 and $12.1 million of United States Treasury securities
supporting various regulatory obligations, respectively. As of December 31, 2009, Deposits included a $72.0
million appeal bond we had been required to post related to the Harman
litigation, which was released by the West Virginia Supreme Court of Appeals
during the first quarter of 2010, as the final appeal of the case at the state
level was resolved in our favor.
We have
committed to the divestiture of certain mining equipment assets which are not
part of our short-term mining plan. At March 31, 2010, the carrying
amount of assets held for sale totaled $18.9 million and is included in Other
current assets.
7
(4) Property,
Plant and Equipment
Property,
plant and equipment is comprised of the following:
March 31, | December 31, | |||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Property,
plant and equipment, at cost
|
$ | 4,646,728 | $ | 4,615,297 | ||||
Accumulated
depreciation, depletion and amortization
|
(2,304,229 | ) | (2,270,527 | ) | ||||
Property, plant and equipment,
net
|
$ | 2,342,499 | $ | 2,344,770 |
Property,
plant and equipment includes gross assets under capital leases of $12.9 million
at March 31, 2010 and December 31, 2009.
During
the first quarter of 2010, we exchanged certain coal reserves to third parties,
recognizing a pre-tax gain of $2.3 million in Other revenue.
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.
(5) Debt
Debt is
comprised of the following:
March 31, | December 31, | |||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
6.875%
senior notes due 2013, net of discount
|
||||||||
of
$3,094 and $3,273, respectively
|
$ | 756,906 | $ | 756,727 | ||||
3.25%
convertible senior notes due 2015, net of discount
|
||||||||
of
$127,794 and $132,628, respectively
|
531,269 | 526,435 | ||||||
6.625%
senior notes due 2010
|
- | 21,949 | ||||||
2.25%
convertible senior notes due 2024
|
9,647 | 9,647 | ||||||
Capital
lease obligations
|
3,946 | 4,328 | ||||||
Total
debt
|
1,301,768 | 1,319,086 | ||||||
Amounts
due within one year
|
(3,855 | ) | (23,531 | ) | ||||
Total
long-term debt
|
$ | 1,297,913 | $ | 1,295,555 |
The
weighted average effective interest rate of the outstanding borrowings was 7.3%
at March 31, 2010 and December 31, 2009.
Convertible
Debt Securities
The
discount associated with the 3.25% Notes is being amortized via the
effective-interest method increasing the reported liability until the notes are
carried at par value on their maturity date. We recognized $4.8
million and $4.5 million of pre-tax non-cash interest expense for the
amortization of the discount for the three months ended March 31, 2010 and 2009,
respectively.
6.625%
Notes
During
January 2010, we redeemed at par the remaining $21.9 million of our 6.625%
senior notes due 2010.
8
(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
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Service
cost
|
$ | 2,642 | $ | 2,382 | ||||
Interest
cost
|
4,444 | 4,172 | ||||||
Expected
return on plan assets
|
(4,605 | ) | (4,026 | ) | ||||
Recognized
loss
|
3,491 | 4,238 | ||||||
Amortization
of prior service cost
|
1 | 10 | ||||||
Net
periodic pension expense
|
$ | 5,973 | $ | 6,776 |
We paid
benefits to participants of the nonqualified supplemental benefit pension plan
of $0.02 million for both the three month periods ended March 31, 2010 and
2009. We expect to voluntarily contribute approximately $0.3 million
for benefit payments to participants for the nonqualified supplemental benefit
pension plan in 2010. During the first quarter of 2010, we
voluntarily contributed $4.6 million to the qualified defined benefit pension
plan. No contributions were made to the qualified defined benefit
pension plan in the first quarter of 2009. We expect to make
voluntary contributions of approximately $20 million to the qualified defined
benefit pension plan in 2010.
(7) Other
Noncurrent Liabilities
Other
noncurrent liabilities is comprised of the following:
March 31, | December 31, | |||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Reclamation
|
$ | 201,689 | $ | 193,361 | ||||
Workers'
compensation and black lung
|
96,332 | 98,227 | ||||||
Other
postretirement benefits
|
156,621 | 155,024 | ||||||
Other
|
88,321 | 91,446 | ||||||
Total
other noncurrent liabilities
|
$ | 542,963 | $ | 538,058 |
(8) Black
Lung and Workers’ Compensation Expense
Expenses
for black lung benefits and workers’ compensation related benefits include the
following components:
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Self-insured
black lung benefits:
|
||||||||
Service
cost
|
$ | 1,000 | $ | 700 | ||||
Interest
cost
|
775 | 750 | ||||||
Amortization
of actuarial gain
|
(875 | ) | (1,025 | ) | ||||
Subtotal
black lung benefits expense
|
900 | 425 | ||||||
Other
workers' compensation benefits
|
7,473 | 9,369 | ||||||
Total
black lung and workers' compensation benefits expense
|
$ | 8,373 | $ | 9,794 |
Payments
for benefits, premiums and other costs related to black lung and workers’
compensation liabilities were $8.4 million and $11.9 million for the three
months ended March 31, 2010 and 2009, respectively.
9
The PPACA
amended previous legislation related to coal workers’ pneumoconiosis (black
lung), providing automatic extension of awarded lifetime benefits to surviving
spouses and providing changes to the legal criteria used to assess and award
claims. We are currently evaluating the impact of these changes to
our current population of beneficiaries and claimants and the effect on
potential future claims.
(9) Other
Postretirement Benefits Expense
Net
periodic postretirement benefit cost includes the following
components:
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Service
cost
|
$ | 812 | $ | 1,037 | ||||
Interest
cost
|
2,378 | 2,518 | ||||||
Recognized
loss
|
830 | 586 | ||||||
Amortization
of prior service credit
|
(763 | ) | (188 | ) | ||||
Net
periodic postretirement benefit cost
|
$ | 3,258 | $ | 3,953 |
Payments
for benefits related to postretirement benefit cost were $1.5 million and $1.6
million for the three months ended March 31, 2010 and 2009,
respectively.
(10) Common
Stock Issuance
On March
23, 2010, we completed a registered underwritten public offering of 9,775,000
shares of our common stock, $0.625 par value per share (“Common Stock”) at a
public offering price of $49.75 per share, resulting in proceeds to us of $466.8
million, net of fees. In April 2010, we used the net proceeds of this
offering to fund a portion of the cash consideration for the acquisition of
Cumberland Resources Corporation and certain affiliated companies
(“Cumberland”). See Note 15 to the Notes to Condensed Consolidated
Financial Statements for a more complete discussion of the acquisition of
Cumberland.
(11) Earnings
Per Share
The
number of shares of our Common Stock used to calculate basic earnings per share
for the three months ended March 31, 2010 and 2009, 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 0.1 million and 3.0 million shares of Common Stock for the
three months ended March 31, 2010 and 2009, respectively, and were excluded from
the calculation of diluted income per share of Common Stock, as such inclusion
would result in antidilution.
10
The
computations for basic and diluted income per share are based on the following
per share information:
Three
Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
(In
Thousands, Except Per Share Amounts)
|
||||||||
Numerator:
|
||||||||
Net
income - numerator for basic
|
$ | 33,626 | $ | 43,426 | ||||
Effect
of convertible notes
|
44 | 44 | ||||||
Adjusted
net income - numerator for diluted
|
$ | 33,670 | $ | 43,470 | ||||
Denominator:
|
||||||||
Weighted
average shares - denominator for basic
|
86,137 | 84,859 | ||||||
Effect
of stock options/restricted stock
|
969 | 32 | ||||||
Effect
of convertible notes
|
287 | 291 | ||||||
Adjusted
weighted average shares - denominator for diluted
|
87,393 | 85,182 | ||||||
Net
income per share:
|
||||||||
Basic
|
$ | 0.39 | $ | 0.51 | ||||
Diluted
|
$ | 0.39 | $ | 0.51 |
The 2.25%
Notes are convertible by holders into shares of Common Stock during certain
periods under certain circumstances. As of March 31, 2010, the price
per share of Common Stock had reached the specified threshold for
conversion. Consequently, the 2.25% Notes are convertible until June
30, 2010, the last day of our second quarter. The 2.25% Notes may be
convertible beyond this date if the specified threshold for conversion is met in
subsequent quarters. If all of the 2.25% Notes outstanding at March
31, 2010 had been eligible for conversion and were converted at that date, 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 March 31, 2010, the 3.25% Notes had not reached the
specified threshold for conversion.
Subsequent
to the first quarter of 2010, we issued 6,519,034 shares of our Common Stock as
partial consideration for our acquisition of Cumberland. See Note 15
to the Notes to Condensed Consolidated Financial Statements for a more complete
discussion.
(12) Derivative
Instruments
Upon
entering into each coal sales and coal purchase contract, we evaluate each of
our contracts to determine if they qualify for the normal purchase normal sale
(“NPNS”) exception prescribed by current accounting guidance. We use
coal purchase contracts to supplement our produced and processed coal in order
to provide coal to meet customer requirements under sales
contracts. We are exposed to certain risks related to coal price
volatility. The purchases and sales contracts we enter into allow us
to mitigate a portion of the underlying risk associated with coal price
volatility. The majority of our contracts qualify for the NPNS
exception and therefore are not accounted for at fair value. For
those contracts that do not qualify for the NPNS exception at inception or lose
their designation at some point during the duration of the contract, the
contracts are required to be accounted for as derivative instruments and must be
recognized as assets or liabilities and measured at fair value. Those
contracts that do not qualify for the NPNS exception 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. Our coal sales and coal purchase
contracts that do not qualify for the NPNS exception as prescribed by current
accounting guidance are offset on a counterparty-by-counterparty basis for
derivative instruments executed with the same counterparty under a master
netting arrangement.
11
Tons
outstanding under coal purchase and coal sales contracts that do not qualify for
the NPNS exception are as follows:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Purchase
contracts
|
1,380 | 980 | ||||||
Sales
contracts
|
2,655 | 1,120 |
The
increase in tons outstanding under coal purchase and coal sales contracts that
do not qualify for the NPNS exception as of March 31, 2010, is primarily due to
certain contracts identified in the first quarter of 2010 that no longer
qualified for the NPNS exception, which are now accounted for at fair
value.
The fair
values of our purchase and sales derivative contracts have been aggregated in
the Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31,
2009, as follows:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Other
current assets
|
$ | 44,944 | $ | 30,564 | ||||
Other
noncurrent assets
|
13,637 | - | ||||||
Total
aggregated derivative balance
|
$ | 58,581 | $ | 30,564 |
We have
recorded net gains related to coal sales and purchase contracts that did not
qualify for the NPNS exception in the Condensed Consolidated Statements of
Income under the caption Gain on derivative instruments.
For
the three months ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
Unrealized
gains on outstanding contracts
|
$ | 28,017 | $ | 20,688 | ||||
Realized
gains/(losses) due to settlements on existing contracts
|
8,436 | (11,821 | ) | |||||
Gain
on derivative instruments
|
$ | 36,453 | $ | 8,867 |
(13) 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.
12
March
31, 2010
|
||||||||||||||||
(In
Thousands)
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Fixed
income securities
|
||||||||||||||||
U.S.
Treasury securities
|
$ | 10,885 | $ | - | $ | - | $ | 10,885 | ||||||||
Money
market funds
|
||||||||||||||||
U.S.
Treasury money market fund
|
122,105 | - | - | 122,105 | ||||||||||||
Other
money market funds
|
1,057,824 | - | - | 1,057,824 | ||||||||||||
Derivative
instruments
|
- | 58,581 | - | 58,581 | ||||||||||||
Short-term
investment
|
- | - | - | - | ||||||||||||
Total
securities
|
$ | 1,190,814 | $ | 58,581 | $ | - | $ | 1,249,395 |
December
31, 2009
|
||||||||||||||||
(In
Thousands)
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Fixed
income securities
|
||||||||||||||||
U.S.
Treasury securities
|
$ | 12,147 | $ | - | $ | - | $ | 12,147 | ||||||||
Money
market funds
|
||||||||||||||||
U.S.
Treasury money market fund
|
74,103 | - | - | 74,103 | ||||||||||||
Other
money market funds
|
689,470 | - | - | 689,470 | ||||||||||||
Derivative
instruments
|
- | 30,564 | - | 30,564 | ||||||||||||
Short-term
investment
|
- | - | 10,864 | 10,864 | ||||||||||||
Total
securities
|
$ | 775,720 | $ | 30,564 | $ | 10,864 | $ | 817,148 |
Fixed
income securities and money market funds
All fixed
income securities are deposits, consisting of obligations of the U.S. Treasury,
supporting various regulatory obligations. All investments in money
market funds are cash equivalents or deposits pledged as collateral and are
invested in 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. See Note 3 to the Notes to Condensed Consolidated Financial
Statements for more information on deposits.
Derivative
Instruments
Certain
of our coal sales and coal purchase contracts that do not qualify for the NPNS
exception at inception or lose their designation at some point during the life
of the contract 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 also consider the risk of
nonperformance of or nonpayment by the counterparties when determining the fair
values for these contracts by evaluating the credit quality and financial
condition of each counterparty. 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 12 to the Notes to
Condensed Consolidated Financial Statements for more information.
Short-Term
Investment
Short-term
investment at December 31, 2009 was comprised of an investment in the Reserve
Primary Fund (“Primary Fund”), a money market fund that suspended redemptions
and is being liquidated. We determined that our investment in the
Primary Fund as of December 31, 2009, no longer met the definition of a
security, within the scope of current accounting guidance, since the equity
investment no longer had a readily determinable fair
value. Therefore, the investment was classified as a short-term
investment, subject to the cost method of accounting, on our Condensed
Consolidated Balance Sheet.
13
Assets
Measured at Fair Value on a Recurring Basis Using Significant Unobservable
Inputs (Level 3):
Short-term
|
||||
(In
Thousands)
|
investment
|
|||
Balance
at December 31, 2009
|
$ | 10,864 | ||
Transfers
out of Level 3
|
(14,644 | ) | ||
Total
gains or (losses) realized/unrealized included in earnings
|
3,780 | |||
Purchases,
issuances, sales and settlements
|
- | |||
Balance
at March 31, 2010
|
$ | - | ||
Total
gains or (losses) for the period included in earnings attributable to the
change
|
||||
in
unrealized gains or losses relating to assets still held at the reporting
date
|
$ | - |
At
December 31, 2009, our investment in the Primary Fund was $10.9 million, net of
a $6.5 million write-down recorded in 2008, which represents the difference
between cost and estimated fair value. During January 2010, we
received a distribution in the amount of $14.6 million. We recorded a $3.8
million gain on short-term investments which represents the difference between
book value and total redemptions received. As of March 31, 2010, the
estimated fair value of our unrecovered investment of $2.7 million in the
Primary Fund was zero.
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 March 31, 2010.
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 is reflected net of discount in the Condensed Consolidated Balance
Sheets.
March
31, 2010
|
December 31, 2009 | ||||||||||||||||
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
||||||||||||||
(In
Thousands)
|
|||||||||||||||||
Short-term
debt
|
$ | 3,855 | $ | 3,855 | $ | 23,531 | $ | 23,465 | |||||||||
Long-term
debt
|
$ | 1,428,710 | $ | 1,440,480 | $ | 1,428,710 | $ | 1,348,699 |
(14) 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
14
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 WV Supreme
Court. The WV Supreme Court heard oral arguments on the matter on
September 8, 2009, and reversed the lower court’s decision on November 12,
2009. The Harman plaintiffs subsequently requested that the WV
Supreme Court reconsider its decision; the WV Supreme Court denied that request
on March 11, 2010. The $72 million of cash we were required to post
as collateral for an appeal bond was returned to us in March 2010.
West
Virginia Flooding
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. Two of these cases
have been dismissed without prejudice for failure to prosecute. The other four
cases are active.
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 without
prejudice from one of the Logan County cases. These complaints cover
approximately 400 plaintiffs seeking unquantified compensatory and punitive
damages from approximately 52 defendants.
We
believe the remaining cases that have not been settled 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. Plaintiffs also 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
restricted by plaintiffs and argued at hearings on December 14, 2007 and June
25, 2008. No rulings on these matters have been
made. 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 held on October 21, 2009. To date, no
decision has been rendered by the WV Supreme Court on the class certification
issues. 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.
15
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 to pay, inter alia, the
value of their property and future water bills. In addition, many
plaintiffs are also claiming that their exposure to the contaminated well water
caused neurological injury or physical injury, including cancers, kidney
problems and gall stones. Finally, all plaintiffs claimed entitlement
to medical monitoring for the next 30 years and have requested unliquidated
compensatory damages for pain and suffering, annoyance and inconvenience and
legal fees. On April 30, 2009, the Mingo Court held a mandatory
settlement conference. At that settlement conference, all plaintiffs agreed to
settle and dismiss their medical monitoring claims. Additionally, 180
plaintiffs agreed to settle all of their remaining claims and be dismissed from
the case. The Mingo Court is currently considering whether to dismiss
the claims of an additional 179 plaintiffs who did not attend the mandatory
settlement conference. All settlements to date will be funded by
insurance proceeds. The plaintiffs are challenging the medical
monitoring settlement. A motion to enforce the medical monitoring
settlement has been filed. No ruling has been made. There
are currently 556 plaintiffs remaining. As a result of the recent
disqualification of Judge Thornsbury, on account of having been engaged as a
lawyer in the 1980s on a matter on behalf of a Massey subsidiary adverse to one
of the plaintiffs, the WV Supreme Court reassigned all the cases to Judge Thomas
Evans. Recently, Judge Evans requested the WV Supreme Court refer the
cases to the statutory mass litigation panel for further
proceedings. The WV Supreme Court ordered all the cases to be
transferred to the mass litigation panel. No trial date has been set,
nor has the mass litigation panel issued any orders as to how the cases will be
resolved or what judge(s) will be responsible for these cases.
Beginning
in December 2008, we and certain of our subsidiaries along with several other
companies were sued in numerous actions in Boone County, West Virginia involving
approximately 350 plaintiffs alleging well water contamination resulting from
coal mining operations. Trial is scheduled for May 2,
2010.
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
16
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, filed claims or 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 resolved a number of these claims in 2009 and early
2010, while discussions with other customers remain ongoing.
We
believe we have strong defenses to the remaining 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 litigation with one customer regarding whether or not
binding contracts for the sale of coal were reached. We maintain that
this customer improperly terminated a signed, higher-priced contract; the
customer argues that it was only required to purchase coal under a purported
agreement reached by email. On February 12, 2010, we received a decision from an
arbitration panel awarding this customer $10.5 million on the grounds that the
purported agreement by email was valid and that the higher-priced contract was
invalid. We believe that the arbitration panel’s decision as to the
validity of the higher-priced contract was beyond the panel’s jurisdiction of
the award, which amounts to $8.2 million, and have challenged that decision in
federal court. We will vigorously pursue this challenge and do not
consider this loss as probable. We have paid $2.3 million for the
award relating to the panels’ decision that the agreement by email was
valid.
We
believe that we have strong defenses to the other claims and potential claims
and further feel that many or all of these claims may be resolved without trial.
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
$60 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 has appealed 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.
Other
Legal Proceedings
We are
parties to a number of other legal proceedings, incident to our normal business
activities. These include, for example, contract dispute,
personal injury, property damage and employment matters. While we
cannot predict the outcome of any 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
17
(15) Subsequent
Events
Upper
Big Branch Mine
On April
5, 2010, an explosion occurred at the Upper Big Branch mine of our Performance
resource group, tragically resulting in the deaths of 29 members. The
Federal Mine Safety and Health Administration and the State of West Virginia
have begun a joint investigation into the cause of the explosion. We
also have commenced our own investigation. We believe these
investigations will continue for the foreseeable future, and we cannot assure
you as to their outcome, including whether we become subject to possible civil
penalties or enforcement actions. The mine will be closed for an
extended period of time, the length of which we cannot predict at this time.
While further analysis will be required, we estimate the range of loss to be $80
million to $150 million for charges related to the benefits being provided to
the families of the fallen miners, costs associated with the rescue and recovery
efforts, insurance deductibles, and possible legal and other
contingencies. It is possible that the total costs incurred related
to this tragedy could exceed these estimates. In addition, the book
value of equipment, mine and longwall panel development and mineral rights at
the mine potentially impacted by the disaster is approximately $62
million. We will assess these assets for possible impairment once
full access to the mine is restored but we do expect to recover much of the
equipment. We expect that certain of these charges will be recorded
in the second quarter of 2010; however, we will continue to review the amount of
any necessary accruals, potential asset impairments, or other related expenses
and record the charges in the period in which the determination is made and an
adjustment is required.
We
self-insure our underground mining equipment, including our
longwalls. At the Upper Big Branch mine we were operating a longwall
and four underground miner sections. We do not currently carry business
interruption insurance for the Upper Big Branch mine. We have
third-party insurance coverage that applies to litigation risk, which coverage
we believe will apply to litigation stemming from the Upper Big Branch mine
explosion.
Our sales
plan for the balance of 2010 was to ship approximately 1.6 million tons of
metallurgical coal from the Upper Big Branch mine. In order to offset
some of the production lost from the Upper Big Branch mine, we developed plans
to increase production at other locations. These plans include more
Saturday production (six days a week versus five) at all currently operating
metallurgical coal mines and the addition of three continuous miner sections at
existing mines within our Elk Run resource group. In total, we
estimate these efforts will result in approximately 1.3 million tons of
annualized metallurgical coal production. Some of the coal produced
through these efforts may not be of similar enough qualities to meet the quality
specifications our metallurgical coal sales contracts previously fulfilled with
coal from the Upper Big Branch mine.
Following
the Upper Big Branch mine tragedy, several stockholder derivative suit
proceedings have been filed naming us as a nominal defendant. Each of
the current and certain former members of the Board of Directors and certain of
our officers have been named as defendants (the “Defendants”). In addition,
a
putative class action has been filed on behalf of certain of our stockholders
alleging disclosure violations of the Securities Exchange Act of 1934, as
amended. Two survivorship suits also have been filed against us. We and
the Defendants have insurance coverage applicable to these
proceedings. While we cannot predict the outcome of any of these
proceedings, based on our current estimates we do not believe that liabilities
arising from these proceedings 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 incurred in the future with respect to these proceedings, in the
aggregate, may be materially adverse to our cash flows, results of operations or
financial condition.
Cumberland
Acquisition
On April
19, 2010, we completed the acquisition of Cumberland for a purchase price of
$640 million in cash, subject to working capital adjustments, and 6,519,034
shares of our Common Stock. Cumberland was one of the largest privately held
coal producers in the United States. The Cumberland operations
include primarily underground coal mines in Southwestern Virginia and Eastern
Kentucky. We obtained an estimated 416 million tons of contiguous coal reserves,
a preparation plant in Kentucky served by the CSX railroad and a preparation
plant in
18
* * * * *
* * *
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,
2009.
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 operations or financial
condition;
|
(ii)
|
the
impact of the Upper Big Branch mine
explosion;
|
(iii)
|
the
successful completion of acquisition, disposition or financing
transactions and the effect thereof on our
business;
|
(iv)
|
our
ability to successfully integrate the operations we acquire, including as
a result of the Cumberland
acquisition;
|
(v)
|
governmental
policies, laws, regulatory actions and court decisions affecting the coal
industry or our customers’ coal
usage;
|
(vi)
|
legal
and administrative proceedings, settlements, investigations and claims and
the availability of insurance coverage related
thereto;
|
(vii)
|
inherent
risks of coal mining beyond our control, including weather and geologic
conditions or catastrophic weather-related
damage;
|
(viii)
|
inherent
complexities make it more difficult and costly to mine in Central
Appalachia than in other parts of the
U.S.;
|
(ix)
|
our
production capabilities to meet market expectations and customer
requirements;
|
(x)
|
our
ability to obtain coal from brokerage sources or contract miners in
accordance with their contracts;
|
(xi)
|
our
ability to obtain and renew permits necessary for our existing and planned
operations in a timely manner;
|
(xii)
|
the
cost and availability of transportation for our produced
coal;
|
(xiii)
|
our
ability to expand our mining
capacity;
|
(xiv)
|
our
ability to manage production costs, including labor
costs;
|
(xv)
|
adjustments
made in price, volume or terms to existing coal supply
agreements;
|
20
(xvi)
|
the
worldwide market demand for coal, electricity and
steel;
|
(xvii)
|
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;
|
(xviii)
|
competition
among coal and other energy producers, in the U.S. and
internationally;
|
(xix)
|
our
ability to timely obtain necessary supplies and
equipment;
|
(xx)
|
our
reliance upon and relationships with our customers and
suppliers;
|
(xxi)
|
the
creditworthiness of our customers and
suppliers;
|
(xxii)
|
our
ability to attract, train and retain a skilled workforce to meet
replacement or expansion needs;
|
(xxiii)
|
our
assumptions and projections concerning economically recoverable coal
reserve estimates;
|
(xxiv)
|
our
failure to enter into anticipated new
contracts;
|
(xxv)
|
future
economic or capital market
conditions;
|
(xxvi)
|
foreign
currency fluctuations;
|
(xxvii)
|
the
availability and costs of credit, surety bonds and letters of credit that
we require;
|
(xxviii)
|
the
lack of insurance against all potential operating
risks;
|
(xxix)
|
our
assumptions and projections regarding pension and other post-retirement
benefit liabilities;
|
(xxx)
|
our
interpretation and application of accounting literature related to mining
specific issues; and
|
(xxxi)
|
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,
2009.
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 first quarter of 2010, of $33.6 million, or $0.39
per diluted share, compared to net income of $43.4 million, or $0.51 per diluted
share, for the first quarter of 2009. The first quarter of 2010
results included a gain on derivative instruments of $36.5 million ($28.0
million of unrealized gains primarily due to certain contracts identified in the
first quarter that no longer qualified for the normal purchase normal sale
(“NPNS”) exception that are now accounted for at fair value plus $8.5 million of
realized gains due to settlements on existing purchase and sales
contracts). Also in the first quarter of 2010, we received $9.1
million in insurance proceeds, resulting in a $5.8 million pre-tax gain on
insurance recovery related to the Bandmill preparation plant fire property
insurance claim and we recognized $1.1 million in pre-tax interest income from
the receipt of interest on black lung excise tax refunds. The first
quarter of 2009 results included a gain on derivative instruments of $8.9
million ($20.7 million of unrealized gains less $11.8 million of realized
losses). The results for the first quarter of 2009 included a pre-tax
gain of $7.1 million on the sale of certain coal reserves and the recognition of
$12.2 million in pre-tax income ($5.1 million benefit recorded in Cost of
purchased coal revenue and $7.1 million in interest income) from the receipt of
black lung excise tax refunds.
Produced
tons sold were 8.5 million in the first quarter of 2010, compared to 10.8
million in the first quarter of 2009. We produced 8.5 million and 11.4 million
tons in the first quarters of 2010 and 2009, respectively. The lower coal
production in 2010 was primarily the result of the idling of higher cost mines
producing coal for the utility market and the reduction of hours worked in
response to lower demand. Shipments of utility coal were down 37% as electric
utilities continued the draw down from previously high stockpile
levels. In addition, weather-related production issues,
weather-related power outages and disruption of rail and ocean transport
significantly impacted our production and shipments during the first two months
of the 2010 first quarter. Exports increased from 1.6 million tons in
the first quarter of 2009 to 1.7 million tons in the first quarter of
2010.
During
the first quarter of 2010, Produced coal revenue decreased by 16% compared to
the first quarter of 2009, reflecting lower shipments of utility grade coal in
2010, down 37% compared to the first quarter of 2009. Our average
Produced coal revenue per ton sold in the first quarter of 2010 increased to
$67.38 compared to $63.03 in the first quarter of 2009 reflecting a shift in
product mix, as shipments of higher priced metallurgical and industrial coal
increased by 33% and 29%, respectively. Our average Produced coal revenue per
ton in the first quarter of 2010 for metallurgical tons sold decreased by 18% to
$84.30 from $102.99 in the first quarter of 2009. The average per ton sales
price for utility and industrial coal was higher in the first quarter of 2010
compared to the first quarter of 2009.
Our
Average cash cost per ton sold (see Note 1 below) was $55.38, compared to $50.53
in the previous year’s first quarter. The increase was due largely to
weather-related production issues, a higher percentage of underground versus
surface mining production, higher sales related costs and higher fixed cost
absorption on lower total tons produced during the period.
While
certain general business conditions continue to improve, the continued high
unemployment level and 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. While demand for metallurgical coal was
disproportionately affected by the recession, the steel industry and the global
metallurgical coal markets have shown signs of improvement. Several
steel producers have restarted idled blast furnaces and production capacity
utilization rates have continued to increase. If these trends continue,
metallurgical coal demand will increase and improve our opportunities to sell
our metallurgical coal products at higher prices. The recent
volatility and disruption of financial markets affected the creditworthiness of
some of our customers and may still limit some of our customers’ ability to
obtain adequate
22
On March
23, 2010, we completed a registered underwritten public offering of 9,775,000
shares of Common Stock at a public offering price of $49.75 per share, resulting
in proceeds to us of $466.8 million, net of fees. We used the
proceeds of this offering to partially fund the acquisition of Cumberland
Resources Corporation and certain affiliated companies (“Cumberland”), as
described below.
On April
5, 2010, an explosion occurred at the Upper Big Branch mine of our Performance
resource group, tragically resulting in the deaths of 29 members. The
Federal Mine Safety and Health Administration and the State of West Virginia
have begun a joint investigation into the cause of the explosion. We
also have commenced our own investigation. We believe these
investigations will continue for the foreseeable future, and we cannot assure
you as to their outcome, including whether we become subject to possible civil
penalties or enforcement actions. The mine will be closed for an
extended period of time, the length of which we cannot predict at this time.
While further analysis will be required, we estimate the range of loss to be $80
million to $150 million for charges related to the benefits being provided to
the families of the fallen miners, costs associated with the rescue and recovery
efforts, insurance deductibles, and possible legal and other
contingencies. It is possible that the total costs incurred related
to this tragedy could exceed these estimates. In addition, the book
value of equipment, mine and longwall panel development and mineral rights at
the mine potentially impacted by the disaster is approximately $62
million. We will assess these assets for possible impairment once
full access to the mine is restored but we do expect to recover much of the
equipment. We expect that certain of these charges will be recorded
in the second quarter of 2010; however, we will continue to review the amount of
any necessary accruals, potential asset impairments, or other related expenses
and record the charges in the period in which the determination is made and an
adjustment is required.
We
self-insure our underground mining equipment, including our
longwalls. At the Upper Big Branch mine we were operating a longwall
and four underground miner sections. We do not currently carry business
interruption insurance for the Upper Big Branch mine. We have
third-party insurance coverage that applies to litigation risk, which coverage
we believe will apply to litigation stemming from the Upper Big Branch mine
explosion.
Our sales
plan for the balance of 2010 was to ship approximately 1.6 million tons of
metallurgical coal from the Upper Big Branch mine. In order to offset
some of the production lost from the Upper Big Branch mine, we developed plans
to increase production at other locations. These plans include more
Saturday production (six days a week versus five) at all currently operating
metallurgical coal mines and the addition of three continuous miner sections at
existing mines within our Elk Run resource group. In total, we
estimate these efforts will result in approximately 1.3 million tons of
annualized metallurgical coal production. Some of the coal produced
through these efforts may not be of similar enough qualities to meet the quality
specifications our metallurgical coal sales contracts previously fulfilled with
coal from the Upper Big Branch mine.
Following
the Upper Big Branch mine tragedy, several stockholder derivative suit
proceedings have been filed naming us as a nominal defendant. Each of
the current and certain former members of the Board of Directors and certain of
our officers have been named as defendants (the “Defendants”). In addition,
a
putative class action has been filed on behalf of certain of our stockholders
alleging disclosure violations of the Securities Exchange Act of 1934, as
amended. Two survivorship suits also have been filed against us. Two
survivorship suits also have been filed against us. We and the Defendants have
insurance coverage applicable to these proceedings. While we cannot
predict the outcome of any of these proceedings, based on our current estimates
we do not believe that liabilities arising from these proceedings 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 incurred in the future with
respect to these proceedings, in the aggregate, may be materially adverse to our
cash flows, results of operations or financial condition.
On April
19, 2010, we completed the acquisition of Cumberland for a purchase price of
$640 million in cash, subject to working capital adjustments, and 6,519,034
shares of Common Stock. Cumberland was one of the largest privately held coal
producers in the United States with 2009 produced coal revenue of $550 million
generated from the production and sale of 8.0 million tons of high quality
Central Appalachian coal. We did not incur or assume any third-party debt as a
result of the Cumberland acquisition.
23
The
Cumberland operations include primarily underground coal mines in Southwestern
Virginia and Eastern Kentucky. We obtained an estimated 416 million tons of
contiguous coal reserves, a preparation plant in Kentucky served by the CSX
railroad and a preparation plant in Virginia served by the Norfolk Southern
railroad. Of the estimated reserves, we believe more than half (216 million
tons) have metallurgical coal qualities.
___________________
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 2009, in order to conform more closely to common
industry reporting practices, we changed our 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 March 31,
|
||||||||
2010
|
2009
|
|||||||
(In
Millions, Except Per Ton Amounts)
|
||||||||
Total
costs and expenses
|
$ |
621.8
|
$ |
695.3
|
||||
Less:
Freight and handling costs
|
74.3
|
57.8
|
||||||
Less:
Cost of purchased coal revenue
|
20.6
|
5.2
|
||||||
Less:
Depreciation, depletion and amortization
|
64.5
|
72.6
|
||||||
Less: Selling,
general and administrative
|
28.1
|
21.9
|
||||||
Less:
Other expense
|
0.9
|
0.8
|
||||||
Less:
Gain on derivative instruments
|
(36.5)
|
(8.9)
|
||||||
Average
cash cost
|
$ |
469.9
|
$ |
545.9
|
||||
Average
cash cost per ton
|
$ |
55.38
|
$ |
50.53
|
||||
|
Results
of Operations
Three
months ended March 31, 2010 compared to three months ended March 31,
2009
Revenues
Three
Months Ended March 31,
|
|||||||||||||||||
Increase
|
%
Increase
|
||||||||||||||||
2010
|
2009
|
(Decrease)
|
(Decrease)
|
||||||||||||||
(In Thousands) | |||||||||||||||||
Revenues
|
|||||||||||||||||
Produced
coal revenue
|
$ | 571,802 | $ | 681,027 | $ | (109,225 | ) | (16)% | |||||||||
Freight
and handling revenue
|
74,289 | 57,782 | 16,507 | 29% | |||||||||||||
Purchased
coal revenue
|
19,465 | 9,940 | 9,525 | 96% | |||||||||||||
Other
revenue
|
23,083 | 19,339 | 3,744 |
19%
|
|||||||||||||
Total
revenues
|
$ | 688,639 | $ | 768,088 | $ | (79,449 | ) | (10)% |
24
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 quarter of 2010,
compared to the first quarter of 2009:
Three
Months Ended March 31,
|
|||||||||||||||||
Increase | % Increase | ||||||||||||||||
2010
|
2009
|
(Decrease)
|
(Decrease)
|
||||||||||||||
(In Millions, Except Per | |||||||||||||||||
Ton Amounts) | |||||||||||||||||
Produced tons sold:
|
|||||||||||||||||
Utility
|
5.2 | 8.3 | (3.1 | ) | (37)% | ||||||||||||
Metallurgical
|
2.4 | 1.8 | 0.6 | 33% | |||||||||||||
Industrial
|
0.9 | 0.7 | 0.2 | 29% | |||||||||||||
Total
|
8.5 | 10.8 | (2.3 | ) | (21)% | ||||||||||||
Produced coal revenue per ton
sold:
|
|||||||||||||||||
Utility
|
$ | 58.88 | $ | 54.14 | $ | 4.74 | 9% | ||||||||||
Metallurgical
|
$ | 84.30 | $ | 102.99 | $ | (18.69 | ) | (18)% | |||||||||
Industrial
|
$ | 70.90 | $ | 65.34 | $ | 5.56 | 9% | ||||||||||
Weighted
average
|
$ | 67.38 | $ | 63.03 | $ | 4.35 | 7% |
Shipments
of utility coal declined during the first quarter of 2010, compared to the same
period in 2009, due to lower customer demand as electric utilities continued the
draw down from previously high stockpile levels. Shipments of
metallurgical and industrial coal increased during the first quarter of 2010,
compared to the same period in 2009, as the economy continued to show signs of
improvement. The average per ton sales price for metallurgical coal
was lower in the first quarter of 2010, compared to the first quarter of 2009,
as the recent recession significantly reduced steel producers demand and plant
utilization, negatively effecting the market price for metallurgical coal at the
time when many of the contracts were negotiated. The average per ton
sales price for utility and industrial coal was higher in the first quarter of
2010, compared to the first quarter of 2009, primarily attributable to favorable
prices contracted for these grades of coal as lower-priced contracts
expired.
Freight
and handling revenue increased in the first quarter of 2010, compared to the
same period in 2009, due to an increase in export metallurgical vessel tons
shipped in the first quarter of 2010, compared to the first quarter of
2009. Additionally, during the first quarter of 2010, we were
responsible for the vessel freight on some of our export shipments; we did not
pay any vessel freight during the first quarter of 2009. The increase
was offset by a decrease in tons exported to utility customers of 0.1 million in
the first quarter of 2010, from 0.8 million tons in the first quarter of
2009.
Purchased
coal revenue increased in the first quarter of 2010, compared to the same period
in 2009, primarily due to an increase in purchased tons sold to 0.3 million in
the first quarter of 2010, from 0.2 million in the first quarter of
2009. Purchased coal revenue per ton increased $7.32 to $70.04 in the
first quarter of 2010, from $62.72 in the first quarter of 2009.
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 first quarter of 2010 includes a $5.8 million
pre-tax gain on insurance recovery related to the Bandmill preparation plant
fire property insurance claim and a pre-tax gain of $2.3 million on exchanges of
coal reserves. Other revenue for the first quarter of 2009 includes a pre-tax
gain of $7.1 million on the sale of our interest in certain coal reserves to a
third party.
25
Costs
Three
Months Ended March 31,
|
|||||||||||||||||
Increase
|
%
Increase
|
||||||||||||||||
2010
|
2009
|
(Decrease)
|
(Decrease)
|
||||||||||||||
(In Thousands) | |||||||||||||||||
Costs
and expenses
|
|||||||||||||||||
Cost
of produced coal revenue
|
$ | 469,936 | $ | 545,925 | $ | (75,989 | ) | (14)% | |||||||||
Freight
and handling costs
|
74,289 | 57,782 | 16,507 | 29% | |||||||||||||
Cost
of purchased coal revenue
|
20,623 | 5,206 | 15,417 | 296% | |||||||||||||
Depreciation,
depletion and amortization,
|
|||||||||||||||||
applicable
to:
|
|||||||||||||||||
Cost
of produced coal revenue
|
64,207 | 71,618 | (7,411 | ) | (10)% | ||||||||||||
Selling,
general and administrative
|
262 | 1,021 | (759 | ) | (74)% | ||||||||||||
Selling,
general and administrative
|
28,109 | 21,870 | 6,239 | 29% | |||||||||||||
Other
expense
|
871 | 783 | 88 | 11% | |||||||||||||
Gain
on derivative instruments
|
(36,453 | ) | (8,867 | ) | (27,586 | ) | 311% | ||||||||||
Total
costs and expenses
|
$ | 621,844 | $ | 695,338 | $ | (73,494 | ) | (11)% |
Cost of
produced coal revenue decreased primarily due to decreased volume of produced
tons sold from 10.8 million in the first quarter of 2009, to 8.5 million in the
first quarter of 2010. The increase in Cost of produced coal revenue
on a per ton basis was partially caused by weather-related production issues, a
higher percentage of underground versus surface mining production, and higher
sales related costs.
Freight
and handling costs increased in the first quarter of 2010, compared to the same
period in 2009, due to an increase in export metallurgical vessel tons shipped
in the first quarter of 2010, compared to the first quarter of 2009. Additionally,
during the first quarter of 2010, we were responsible for the vessel freight on
some of our export shipments; we did not pay any vessel freight during the first
quarter of 2009. The increase was offset by a decrease in tons
exported to utility customers of 0.1 million in the first quarter of 2010, from
0.8 million tons in the first quarter of 2009.
Cost of
purchased coal revenue increased in the first quarter of 2010, compared to the
same period in 2009, primarily due to an increase in purchased tons sold to 0.3
million in the first quarter of 2010, from 0.2 million in the first quarter of
2009. Additionally, the first quarter of 2009 includes a $5.1 million
black lung excise tax refund, reducing Cost of purchased coal
revenue.
Depreciation,
depletion and amortization decreased in the first quarter of 2010, compared to
the same period in 2009, partially attributed to less amortization of
development costs on lower produced tons in the first quarter of 2010, and lower
capital expenditures during fiscal year 2009 compared to 2008.
Selling,
general and administrative expense was higher in the first quarter of 2010,
compared to the first quarter of 2009, due to an increase in stock-based
compensation accruals in 2010, caused by an increase in our stock price during
the first quarter of 2010.
Gain on
derivative instruments for the first quarter of 2010, represents a gain on
derivative instruments of $36.5 million ($28.0 million of unrealized gains
primarily due to certain contracts identified in the first quarter that no
longer qualified for the NPNS exception that are now accounted for at fair value
plus $8.5 million of realized gains due to settlements on existing purchase and
sales contracts). The first quarter of 2009 results included a gain
on derivative instruments of $8.9 million ($20.7 million of unrealized gains
less $11.8 million of realized losses). See Note 12 to the
Notes to Condensed Consolidated Financial Statements for further
discussion.
26
Interest
Income
Interest
income decreased for the first quarter of 2010, compared to the same period in
2009, as a result of interest income on black lung excise tax refunds of $1.1
million in the first quarter of 2010, compared to $7.1 million in the first
quarter of 2009.
Interest
Expense
Interest
expense includes $4.8 million and $4.5 million of non-cash interest expense for
the amortization of the discount of our 3.25% Notes for the first quarter of
2010 and 2009, respectively (see Note 5 to the Notes to Condensed Consolidated
Financial Statements for further discussion).
Gain
on short-term investment
Gain on
short-term investment reflects the difference between our book value in the
Reserve Primary Fund (“Primary Fund”) and total distributions received from the
fund. At December 31, 2009, our investment in the Primary Fund was
$10.9 million, net of a $6.5 million write-down recorded in
2008. During January 2010, we received a distribution from the
Primary Fund in the amount of $14.6 million.
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 quarter of 2010 to the first 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 2010 income tax rate was a $2.6
million charge related to the reduction in the tax benefit available to us as a
result of the Patient Protection and Affordable Care Act (“PPACA”) signed into
law in March 2010. Also impacting the 2009 income tax rate were
favorable adjustments in connection with the election to forego bonus
depreciation and claim a refund for alternative minimum tax
credits.
Liquidity
and Capital Resources
At March
31, 2010, our available liquidity was $1,261.5 million, comprised of Cash and
cash equivalents of $1,162.9 million and $98.6 million of availability from our
asset-based revolving credit facility (“ABL”). On April 19, 2010,
subsequent to the first quarter, we paid $640.0 million in cash as partial
consideration for the acquisition of Cumberland (see Notes 10 and 15 to the
Notes to Condensed Consolidated Financial Statements for further discussion).
Our total debt-to-book capitalization ratio was 42.4% at March 31,
2010.
Our Debt
was comprised of the following:
March 31, | December 31, | |||||||
2010
|
2009
|
|||||||
(In
Thousands)
|
||||||||
6.875%
senior notes due 2013, net of discount
|
||||||||
of
$3,094 and $3,273, respectively
|
$ | 756,906 | $ | 756,727 | ||||
3.25%
convertible senior notes due 2015, net of discount
|
||||||||
of
$127,794 and $132,628, respectively
|
531,269 | 526,435 | ||||||
6.625%
senior notes due 2010
|
- | 21,949 | ||||||
2.25%
convertible senior notes due 2024
|
9,647 | 9,647 | ||||||
Capital
lease obligations
|
3,946 | 4,328 | ||||||
Total
debt
|
1,301,768 | 1,319,086 | ||||||
Amounts
due within one year
|
(3,855 | ) | (23,531 | ) | ||||
Total
long-term debt
|
$ | 1,297,913 | $ | 1,295,555 |
We
believe that we are currently in compliance with our debt
covenants.
27
6.625%
Notes
During
January 2010, we redeemed at par the remaining $21.9 million of our 6.625%
senior notes due 2010.
Common
Stock Issuance
On March
23, 2010, we completed a registered underwritten public offering of 9,775,000
shares of our Common Stock at a public offering price of $49.75 per share,
resulting in proceeds to us of $466.8 million, net of fees. In April
2010, we used the net proceeds of this offering to fund a portion of the cash
consideration for the acquisition of Cumberland. See Notes 10 and 15
to the Notes to Condensed Consolidated Financial Statements for a more complete
discussion.
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 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 or (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
March 31, 2010, there were $76.4 million of letters of credit issued and there
were no outstanding borrowings under our ABL. As of March 31, 2010,
we had $98.6 million of availability under our ABL.
Cash
Flow
Net cash
provided by operating activities was $77.2 million for the three months ended
March 31, 2010 compared to $40.9 million for the three months ended March 31,
2009. 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 $31.4 million and $75.6 million for the
three months ended March 31, 2010 and 2009, respectively. The cash used in
investing activities reflects capital expenditures in the amount of $56.1
million and $103.7 million for the three months ended March 31, 2010 and 2009,
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 three months ended March 31, 2010 and
2009 included $1.0 million and $13.6 million, respectively, of proceeds provided
by the sale of assets. The three months ended March 31, 2010 also includes $9.1
million of proceeds from insurance recoveries.
Net cash
provided and (utilized) by financing activities was $451.4 million and ($5.6)
million for the three months ended March 31, 2010 and 2009,
respectively. Financing activities for the three months ended March
31, 2010 primarily reflects a registered underwritten public equity offering,
resulting in proceeds to us of $466.8 million, net of fees, partially offset by
the repayment of our 6.625% Notes of $21.9 million. Financing activities for the
three months ended March 31, 2009, primarily reflects a payment of $5.1 million
for the regular quarterly dividend on shares of our Common Stock.
We
believe that cash on hand, after giving effect to the $640 million in cash used
for the Cumberland acquisition, 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, anticipated
capital expenditures and costs related to the Upper Big Branch mine tragedy (see
Note 15 to the Notes to Condensed Consolidated Financial Statements), including
any increased premiums for insurance, any claims that may be asserted against us
and other expenses that are not covered, in whole or in part, by our insurance
policies, the outcome of the federal and state investigations into the cause of
the Upper Big Branch mine tragedy and the possible impairment of equipment at
the Upper Big Branch mine, 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,
fund planned capital expenditures or pay the costs related to the Upper Big
Branch mine tragedy, will substantially
28
We
frequently evaluate potential acquisitions. In the past, we have funded
acquisitions primarily with cash 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, 2009, for a discussion of certain trends and
uncertainties that may impact our business.
The
accident at our Upper Big Branch mine will have a negative impact on our
business.
On April
5, 2010, an explosion occurred at our Upper Big Branch mine at our Performance
resource group in West Virginia. The explosion tragically resulted in
the deaths of 29 miners. The MSHA and the State of West Virginia have begun a
joint investigation into the cause of the explosion. We also have
commenced our own investigation. We believe these investigations will
continue for the foreseeable future, and we cannot assure you as to their
outcome, including whether we become subject to possible civil penalties or
enforcement actions. The mine will be closed for an extended period of
time, the length of which we cannot predict at this time. As a result
of the accident,
our business will be negatively impacted by various factors, including the
ability to produce coal from this mine, our inability to cover planned coal
production from this mine from other sources and the
resulting loss of revenues, the diversion of management’s attention from our
day-to-day business, negative media attention relating to us, any negative
perceptions about our safety record affecting our ability to attract skilled
labor, any increased premiums for insurance, claims that are asserted against us
and other expenses that are not covered, in whole or in part, by our insurance
policies and the outcome of the federal and state investigations into the cause
of the explosion. Additionally, increased regulation of the mining
industry as a whole would result in higher operating costs, which would, in
turn, adversely affect our operating results. While further analysis
will be required, we estimate the range of loss to be $80 million to $150
million for charges related to the benefits being provided to the families of
the fallen miners, costs associated with the rescue and recovery efforts,
insurance deductibles, and possible legal and other contingencies. It
is possible that the total costs incurred related to this tragedy could
exceed these estimates. In addition, the book value of equipment, mine and
longwall panel development and mineral rights at the mine potentially impacted
by the disaster is approximately $62 million. We will assess these
assets for possible impairment once full access to the mine is restored but we
do expect to recover much of the equipment. We expect that certain of
these charges will be recorded in the second quarter of 2010; however, we will
continue to review the amount of any necessary accruals, potential asset
impairments, or other related expenses and record the charges in the period in
which the determination is made and an adjustment is required. See
Note 15 to the Notes to Condensed Consolidated Financial Statements for a more
complete discussion.
Recent
healthcare legislation could adversely affect our financial condition and
results of operations.
In
March 2010, the PPACA was enacted, potentially impacting our costs to
provide healthcare benefits to our eligible active and certain retired
employees, and our costs to provide workers’ compensation benefits related to
occupational disease resulting from coal workers’ pneumoconiosis (black lung
disease). Implementation of this legislation is planned to occur in
phases over a number of years.
29
Required
changes that could affect us in the short term include raising the maximum age
for covered dependents to receive benefits, the elimination of lifetime dollar
limits per covered individual and restrictions on annual dollar limits per
covered individual, among other requirements. Required changes that
could affect us in the long term include a tax on “high cost” plans (excise tax)
and the elimination of annual dollar limits per covered individual, among other
requirements.
One
provision of the legislation changes the tax treatment for Medicare drug
subsidies. Beginning in fiscal year 2014, the tax deduction available
to us will be reduced to the extent our drug expenses are reimbursed under the
Medicare Part D retiree drug subsidy program. Because retiree health
care liabilities and the related tax impacts are already reflected in our
Condensed Consolidated Financial Statements, we are required to recognize the
full accounting impact of this accounting standard update in the period in which
the Act was signed into law. The total non-cash charge to Income tax
expense related to the reduction in the tax benefit is $2.6 million, recorded in
the first quarter of 2010.
We are
currently analyzing this legislation to determine the full extent of the impact
of the required changes on our employee healthcare plans and the resulting
costs.
The PPACA
also amended previous legislation related to coal workers’ pneumoconiosis (black
lung), providing automatic extension of awarded lifetime benefits to surviving
spouses and providing changes to the legal criteria used to assess and award
claims. We are currently evaluating the impact of these changes to
our current population of beneficiaries and claimants and the effect on
potential future claims.
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 the 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
March 31, 2010, we had $121.5 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 $76.4 million was issued under our ABL. No
claims were outstanding against those letters of credit as of March 31,
2010.
We use
surety bonds to secure reclamation, workers’ compensation, wage payments and
other miscellaneous obligations. As of March 31, 2010, we had $327.5 million of
outstanding surety bonds. These bonds were in place to secure obligations as
follows: post-mining reclamation bonds of $314.6 million and other miscellaneous
obligation bonds of $12.9 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 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 March 31, 2010, 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,
2009, for a discussion of our critical accounting estimates and
assumptions.
30
Recent
Accounting Pronouncements
In
January 2010, the FASB issued an accounting standard update, amending disclosure
requirements related to Fair Value Measurements and Disclosures, as
follows:
|
1.
|
Significant
transfers between Level 1 and 2 shall be disclosed separately, including
the reasons for the transfers; and
|
|
2.
|
Information
about purchases, sales, issuances and settlements shall be disclosed
separately in the reconciliation of activity in Level 3 fair value
measurements.
|
This
accounting standard update is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlements in the reconciliation of activity in Level 3
fair value measurements, which are effective for interim and annual reporting
periods beginning after December 15, 2010. The adoption of this accounting
standard update did not have a material impact on our financial position or
results of operations. See Note 13 to the Notes to Condensed
Consolidated Financial Statements for more information on our Fair Value
Measurements and Disclosures.
In April
2010, the FASB issued an accounting standard update, amending disclosure
requirements related to income taxes, as a result of the PPACA, which became law
on March 23, 2010, and was subsequently amended on March 30,
2010. Beginning in fiscal year 2014, the tax deduction available to
us will be reduced to the extent our drug expenses are reimbursed under the
Medicare Part D retiree drug subsidy program. Because retiree health
care liabilities and the related tax impacts are already reflected in our
Condensed Consolidated Financial Statements, we are required to recognize the
full accounting impact of this accounting standard update in the period in which
the PPACA was signed into law. The total non-cash charge to Income
tax expense related to the reduction in the tax benefit is $2.6 million,
recorded in the first quarter of 2010.
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,
2009, for a discussion of certain market risk factors, which may impact our
business.
Our
derivative contracts that do not qualify for NPNS designation 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 12 to the Notes to
Condensed Consolidated Financial Statements for further discussion of our
derivatives. The outstanding purchase and sales contracts at March 31, 2010,
that are accounted for as derivative instruments, are summarized as
follows:
Tons | |||||||||
Price
Range
|
Outstanding
|
Delivery
Period
|
|||||||
Purchase
Contracts
|
$56.50 - $66.00 | 1,380,000 |
04/01/2010
- 12/31/2011
|
||||||
Sales
Contracts
|
$54.00 - $127.00 | 2,655,000 |
04/01/2010
- 12/31/2011
|
As of
March 31, 2010, a hypothetical increase of 10% in the forward market price would
result in an additional fair value loss recorded for these derivative
instruments of $7.6 million. A hypothetical decrease of 10% in the
forward market price would result in a fair value gain recorded for these
derivative instruments of $7.6 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
31
There has
been no change in our internal control over financial reporting during the three
months ended March 31, 2010, 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
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, 2009, and in subsequently filed interim reports, as they
relate to the fiscal quarter ended March 31, 2010, are set forth in Note 14,
“Contingencies,” and Note 15, "Subsequent Events," of the Notes to Condensed
Consolidated Financial Statements in this Quarterly Report on Form 10-Q and is
incorporated herein by reference.
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, 2009, 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, 2009, except as follows (all of which were previously
included in a prospectus supplement we filed on April 21, 2010, to a shelf
registration statement on Form S-3 (Registration No. 333-152776)).
Federal,
state and local laws and government regulations applicable to operations
increase costs and may make our coal less competitive than other coal
producers.
We incur
substantial costs and liabilities under increasingly strict federal, state and
local environmental, health and safety and endangered species laws, regulations
and enforcement policies. Failure to comply with these laws and
regulations may result in the assessment of administrative, civil and criminal
penalties, the imposition of cleanup and site restoration costs and liens, the
issuance of injunctions to limit or cease operations, the suspension or
revocation of permits and other enforcement measures that could have the effect
of limiting production from our operations. In this regard, MSHA and
the State of West Virginia have begun a joint investigation into the cause of
the April 5, 2010 explosion at our Upper Big Branch mine at our Performance
resource group in West Virginia. The
32
New
legislation and new regulations, including legislation and regulations resulting
from the April 5, 2010 explosion at our Upper Big Branch mine, may be adopted
which could materially adversely affect our mining operations, cost structure or
our customers’ ability to use coal. New legislation and new
regulations may also require us, as well as our customers, to change operations
significantly or incur increased costs. The U.S. Environmental
Protection Agency has undertaken broad initiatives to increase compliance with
emissions standards and to provide incentives to our customers to decrease their
emissions, often by switching to an alternative fuel source or by installing
scrubbers or other expensive emissions reduction equipment at their coal-fired
plants.
The
MSHA or other federal or state regulatory agencies may order certain of our
mines to be temporarily or permanently closed, which could adversely affect our
ability to meet our customers’ demands.
MSHA or
other federal or state regulatory agencies may order certain of our mines to be
temporarily or permanently closed. Our Upper Big Branch mine at our Performance
resource group in West Virginia is currently closed following the April 5, 2010
explosion and we cannot predict at this time when it will reopen. Our customers
may challenge our issuance of force majeure notices in connection with such
closures. If these challenges are successful, we may have to purchase coal from
third-party sources to satisfy those challenges; negotiate settlements with
customers, which may include price reductions, the reduction of commitments or
the extension of the time for delivery; terminate customers’ contracts; and/or
face claims initiated by our customers against us. The resolution of these
challenges could have a material adverse impact on our cash flows, results of
operations or financial condition.
We
are subject to various legal proceedings, which may have a material effect on
our business.
We are
party to a number of legal proceedings incident to normal business activities.
Some of the allegations brought against us are with merit, while others are not.
We are also subject to legal proceedings as a result of the April
5, 2010 explosion at our Upper Big Branch mine at our Performance resource group
in West Virginia. There is always the potential that an individual matter
or the aggregation of many matters could have a material adverse effect on our
cash flows, results of operations or financial position. See Note 15 of the
Notes to Condensed Consolidated Financial Statements for a more complete
discussion.
Changes
in federal or state income tax laws, particularly in the area of percentage
depletion, could cause our financial position and profitability to
deteriorate.
The
federal government has been reviewing the income tax laws relating to the coal
industry regarding percentage depletion benefits. If the percentage depletion
tax benefit was reduced or eliminated, our cash flows, results of operations or
financial condition could be materially impacted.
Risks
Related to the Cumberland Acquisition
We
completed the acquisition of Cumberland on April 19,
2010. Cumberland’s operations, which are located in Kentucky and
Virginia, consist of 25 underground mines, 19 of which are self-operated and six
of which are contracted, and two surface mines, both of which are contracted. A
portion of Cumberland’s workforce includes contract employees and substantially
all of its mining operations occur on properties that it leases. Cumberland’s
business, financial condition and results of operations are subject to many of
the same risks associated with our operations. These risks are
discussed in this Form 10-Q and in our Form 10-K for the year ended December 31,
2009, and include, but are not limited to the following additional risk
factors:
33
We may not
realize the expected benefits of the Cumberland Acquisition because of
integration difficulties and other challenges.
The success of the
acquisition of Cumberland will depend, in part, on our ability to realize the
anticipated benefits from integrating Cumberland’s business with our existing
businesses. The integration process may be complex, costly and time-consuming.
The difficulties of integrating the operations of Cumberland’s business include,
among others:
· | failure to implement our business plan for the combined business; | ||
· | unanticipated issues in integrating Cumberland’s operations with ours; | ||
· | unanticipated disruptions in our business, including relationships with customers; | ||
· | unanticipated changes in applicable laws and regulations; | ||
· | failure to retain key employees; | ||
· | failure to retain key customers; | ||
· | failure to increase metallurgical coal production or sales; | ||
· | operating risks inherent in Cumberland’s business and our business; | ||
· | the impact on our internal controls and compliance with the regulatory requirements under the | ||
Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”); | |||
· | unanticipated issues, expenses and liabilities; and | ||
· | difficulties in fully identifying and evaluating potential liabilities, risks and operating issues. |
We may not be able
to maintain the levels of revenue, earnings or operating efficiency that each of
Massey and Cumberland had achieved or might achieve separately. In addition, we
may not accomplish the integration of Cumberland’s business smoothly,
successfully or within the anticipated costs or timeframe.
Following the
Cumberland Acquisition, we will have goodwill and intangible assets on our
consolidated financial statements that are subject to impairment based upon
future adverse changes in our business or prospects.
At December 31,
2009, as a result of the Cumberland acquisition, on a pro forma basis based on a
preliminary estimate of the allocation of the purchase price for the Cumberland
acquisition, we would have had goodwill of $82.5 million and $58.2 million
of identifiable intangible assets. We will evaluate goodwill for impairment
annually in the fourth quarter, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. Goodwill impairment is
indicated when the book value of these assets exceeds fair value. Impairment of
identifiable intangible 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. The value of goodwill and
intangible assets from the allocation of purchase price from the Cumberland
acquisition will be derived from our business operating plans and is susceptible
to an
adverse change in demand, input costs or general changes in our business or
industry and could require an impairment charge in the future.
The new
obligations of Cumberland becoming part of a public company may require
significant resources and management attention.
Upon consummation of the
Cumberland acquisition, we acquired a privately-held company that had not
previously been required to prepare or file periodic and other reports with the
SEC under applicable federal securities laws, to comply with the requirements of
the federal securities laws applicable to public companies, including rules and
regulations implemented by the SEC and the Public Company Accounting Oversight
Board or to document and assess the effectiveness of its internal control over
financial reporting in order to satisfy the requirements of Section 404 of
Sarbanes-Oxley. We will need to include an assessment of our internal control
over financial reporting that includes the Cumberland business in our periodic
reports by December 31, 2011. Establishing, testing and maintaining an
effective system of internal control over financial reporting requires
significant resources and time commitments on the part of our management and our
finance and accounting staff, may require additional staffing and infrastructure
investments, could increase our legal, insurance and financial compliance costs
and may divert the attention of management. In addition, our actual operating
costs may exceed the
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 first quarter of 2010.
Total Number of | |||||||
Shares Purchased as | Maximum Number | ||||||
Part of Publicly | of Shares that May | ||||||
Total Number of | Average Price | Announced Plans or | Yet Be Purchased | ||||
Period | Shares Purchased | Paid per Share | Progams (1) | Under the Plan | |||
(In Thousands, Except Average Price Paid Per Share) | |||||||
Jan. 1 through Jan. 31 | - | - | - | - | |||
Feb. 1 through Feb. 28 | - | - | - | - | |||
Mar. 1 through Mar. 31 | - | - | - | - | |||
Total | - | - | 9,448,819 (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 $44.45, the closing price of Common Stock
as reported on the New York Stock Exchange on April 23,
2010.
|
35
10.1
|
Amendment
to Change in Control Severance Agreement between Massey Energy Company and
Don. L. Blankenship dated February 16, 2010 [filed
herewith]
|
10.2
|
Amendment
to Change in Control Severance Agreement between Massey Energy Company and
J. Christopher Adkins dated February 16, 2010 [filed
herewith]
|
10.3
|
Amendment
to Change in Control Severance Agreement between Massey Energy Company and
Michael K. Snelling dated February 16, 2010 [filed
herewith]
|
10.4
|
Amendment
to Change in Control Severance Agreement between Massey Energy Company and
Eric B. Tolbert dated February 16, 2010 [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
March 31, 2010, furnished in XBRL (eXtensible Business Reporting
Language)).
|
Attached
as Exhibit 101 to this report are the following documents formatted in
XBRL: (i) the Condensed Consolidated Statements of Income for the
three months ended March 31, 2010 and 2009, (ii) the Condensed
Consolidated Balance Sheets at March 31, 2010 and December 31, 2009,
(iii) the Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2010 and 2009 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: April 30, 2010 | /s/ Eric B. Tolbert | |
Eric B. Tolbert, | ||
Vice President and Chief Financial Officer | ||
Date: April 30, 2010 | /s/ David W. Owings | |
David W. Owings, | ||
Controller |
37