form10q050908.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                      to
 

Commission File Number:  1-7775

MASSEY ENERGY COMPANY
 
(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 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 20, 2008 there were 80,570,841 shares of common stock, $0.625 par value, outstanding.
 
 
 
 
 
MASSEY ENERGY COMPANY

FORM 10-Q

For the Quarterly Period Ended March 31, 2008




TABLE OF CONTENTS
PAGE
   
Part I:   Financial Information
  
   
Item 1. Financial Statements
1
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
14
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
22
   
Item 4. Controls and Procedures
22
   
Part II:  Other Information
  
   
Item 1. Legal Proceedings
22
   
Item 1A. Risk Factors
22
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
23
   
Item 6. Exhibits
23
   
Signatures
24
 
 
 
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,
  
   
2008
    
2007
  
Revenues
            
Produced coal revenue
   $ 543,231     $ 519,693  
Freight and handling revenue
     65,042       43,852  
Purchased coal revenue
     10,674       25,174  
Other revenue
     25,678       18,601  
Total revenues
     644,625       607,320  
                 
Costs and expenses
                
Cost of produced coal revenue
     418,227       402,517  
Freight and handling costs
     65,042       43,852  
Cost of purchased coal revenue
     9,864       22,160  
Depreciation, depletion and amortization, applicable to:
                
Cost of produced coal revenue
     59,348       61,337  
Selling, general and administrative
     904       812  
Selling, general and administrative
     21,479       18,689  
Other expense
     786       2,396  
Total costs and expenses
     575,650       551,763  
                 
Income before interest and taxes
     68,975       55,557  
                 
Interest income
     5,221       5,410  
Interest expense
     (20,957 )     (21,436 )
                 
Income before taxes
     53,239       39,531  
                 
Income tax expense
     (11,305 )     (6,924 )
                 
Net income
   $ 41,934     $ 32,607  
                 
                 
Net income per share
                
Basic
   $ 0.53     $ 0.40  
Diluted
   $ 0.52     $ 0.40  
                 
Shares used to calculate Net income per share
                
Basic
     79,768       80,563  
Diluted
     80,597       81,048  
                 
Dividends per share
   $ 0.05     $ 0.04  

See Notes to Condensed Consolidated Financial Statements.
 
1

 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
  
(In Thousands, Except Share Amounts)
  
UNAUDITED
  
   
March 31,
    
December 31,
  
   
2008
      
2007*
  
               
ASSETS
              
               
Current Assets
              
   Cash and cash equivalents
   $ 391,047     $ 365,220  
   Trade and other accounts receivable, less allowance of $444
                
         at March 31, 2008 and December 31, 2007
     197,690       156,572  
   Inventories
     189,693       183,360  
   Income taxes receivable
     319       16,302  
   Other current assets
     156,604       165,940  
           Total current assets
     935,353       887,394  
                 
Net Property, Plant and Equipment
     1,870,471       1,793,920  
Other Noncurrent Assets
                
    Pension assets
     47,036       47,323  
    Other
     132,369       132,034  
           Total other noncurrent assets
     179,405       179,357  
                 
           Total assets
   $ 2,985,229     $ 2,860,671  

* Amounts at December 31, 2007 have been derived from audited financial statements.

(Continued On Next Page)
 
 
2
 

 
MASSEY ENERGY COMPANY
  
CONDENSED CONSOLIDATED BALANCE SHEETS
  
(In Thousands, Except Share Amounts)
  
UNAUDITED
  
   
March 31,
    
December 31,
  
   
2008
      
2007*
  
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
              
               
Current Liabilities
              
    Accounts payable, principally trade and bank overdrafts
   $ 164,629     $ 148,206  
    Current portion of debt
     1,899       1,875  
    Payroll and employee benefits
     48,019       46,512  
    Other current liabilities
     209,743       171,269  
          Total current liabilities
     424,290       367,862  
                 
Noncurrent Liabilities
                
     Long-term debt
     1,102,732       1,102,672  
     Deferred taxes
     157,691       154,705  
     Other noncurrent liabilities
     460,999       451,428  
           Total noncurrent liabilities
     1,721,422       1,708,805  
                 
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
                
           83,415,465 and 82,818,578 shares at March 31, 2008 and
                
           December 31, 2007, respectively
     52,118       51,743  
     Treasury stock, 2,874,800 shares at cost
     (79,986 )     (79,986 )
     Additional capital
     255,162       237,684  
     Retained earnings
     639,533       601,587  
     Accumulated other comprehensive loss
     (27,310 )     (27,024 )
           Total shareholders’ equity
     839,517       784,004  
                 
           Total liabilities and shareholders’ equity
   $ 2,985,229     $ 2,860,671  

* Amounts at December 31, 2007 have been derived from audited financial statements.

See Notes to Condensed Consolidated Financial Statements.
 
3
 
 
 
MASSEY ENERGY COMPANY
  
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  
(In Thousands)
  
UNAUDITED
  
   
Three Months Ended March 31,
  
   
2008
    
2007
  
             
CASH FLOWS FROM OPERATING ACTIVITIES
            
Net income
   $ 41,934     $ 32,607  
Adjustments to reconcile Net income to Cash provided by operating
                
activities:
                
Depreciation, depletion and amortization
     60,252       62,149  
Share-based compensation expense
     3,757       3,143  
Deferred income taxes
     6,309       (390 )
Loss (gain) on disposal of assets
     641       (2,664 )
Gain on reserve exchange
     (13,559 )     -  
Asset retirement obligations accretion
     2,976       2,894  
Changes in operating assets and liabilities:
                
Increase in accounts receivable
     (42,377 )     (43,212 )
Increase in inventories
     (6,333 )     (3,175 )
Decrease in other current assets
     9,336       11,996  
Increase in pension and other assets
     (120 )     (1,737 )
Increase in accounts payable and bank overdrafts
     16,423       11,935  
Increase (decrease) in accrued income taxes
     15,983       (7,307 )
Increase in other accrued liabilities
     39,964       18,652  
Increase in other noncurrent liabilities
     3,580       11,055  
Asset retirement obligations payments
     (1,335 )     (1,937 )
Cash provided by operating activities
     137,431       94,009  
                 
CASH FLOWS FROM INVESTING ACTIVITIES
                
Capital expenditures
     (123,547 )     (59,853 )
Proceeds from sale of assets
     1,357       2,091  
Cash utilized by investing activities
     (122,190 )     (57,762 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES
                
Repayments of capital lease obligations
     (452 )     (1,262 )
Cash dividends paid
     (3,971 )     (3,222 )
Proceeds from stock options exercised
     11,866       227  
Income tax benefit from stock option exercises
     3,143       68  
Cash provided (utilized) by financing activities
     10,586       (4,189 )
                 
Increase in cash and cash equivalents
     25,827       32,058  
Cash and cash equivalents at beginning of period
     365,220       239,245  
                 
Cash and cash equivalents at end of period
   $ 391,047     $ 271,303  


See Notes to Condensed Consolidated Financial Statements

 
 
4
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(1)           General

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”) for the year ended December 31, 2007. 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, 2008 are not necessarily indicative of results that can be expected for the fiscal year ending December 31, 2008.

The condensed consolidated financial statements included herein are unaudited; however, they contain all adjustments (consisting of normal recurring accruals), which, in our opinion, are necessary to present fairly our consolidated financial position at March 31, 2008 and our consolidated results of operations and cash flows for the three months ended March 31, 2008 and 2007, in conformity with accounting principles generally accepted in the United States.

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 fully and unconditionally guarantees our obligations under the 6.625% senior notes due 2010 (the “6.625% Notes”), the 6.875% senior notes due 2013 (the “6.875% Notes”), the 4.75% convertible senior notes due 2023 (the “4.75% Notes”) and the 2.25% convertible senior notes due 2024 (the “2.25% Notes”). In addition, the 6.625% Notes, the 6.875% Notes and the 2.25% Notes are fully and unconditionally, jointly and severally guaranteed by A.T. Massey and substantially all of our indirect operating subsidiaries, each such subsidiary being indirectly 100% owned by us. The subsidiaries not providing a guarantee of the 6.625% Notes, the 6.875% 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 for a more complete discussion of debt.


(2)           Inventories

Inventories consisted of the following:


   
March 31, 2008
    
December 31, 2007
  
   
(In Thousands)
  
Saleable coal
   $ 115,492     $ 120,343  
Raw coal
     20,474       11,471  
Subtotal coal inventory
     135,966       131,814  
Supplies inventory
     53,727       51,546  
Total inventory
   $ 189,693     $ 183,360  


Saleable coal represents coal ready for sale, including inventories designated for customer facilities under consignment arrangements of $31.9 million and $62.1 million at March 31, 2008 and December 31, 2007, respectively. Raw coal represents coal that generally requires further processing prior to shipment to the customer.

 
 
5
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(3)           Other Current Assets

Other current assets are comprised of the following:

   
March 31, 2008
    
December 31, 2007
  
   
(In Thousands)
  
Longwall panel costs
   $ 17,164     $ 18,029  
Deposits
     119,688       118,944  
Other
     19,752       28,967  
     Total other current assets
   $ 156,604     $ 165,940  


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, 2008 and December 31, 2007, deposits include $96.0 million of funds pledged as collateral to support $45.1 million of outstanding letters of credit and a $50.0 million appeal bond.  In addition, there were $13.0 million of United States Treasury securities supporting various regulatory obligations.


(4)           Property, Plant and Equipment

Property, plant and equipment is comprised of the following:


   
March 31, 2008
    
December 31, 2007
  
   
(In Thousands)
  
Property, plant and equipment, at cost
   $ 3,774,650     $ 3,649,853  
Accumulated depreciation, depletion and amortization
     (1,904,179 )     (1,855,933 )
    Net property, plant and equipment
   $ 1,870,471     $ 1,793,920  


Property, plant and equipment includes gross assets under capital leases of $17.3 million at March 31, 2008 and December 31, 2007.

During the first quarter of 2008, we exchanged coal reserves with a third party, recognizing a gain in Other Revenue of $13.6 million (pre-tax) in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 153, “Exchanges of Nonmonetary Assets, an Amendment of APB No. 29, Accounting for Nonmonetary Transactions.”  The acquired coal reserves were recorded in Property, plant and equipment at the fair value of the reserves surrendered.
 
 
(5)           Debt

Debt is comprised of the following:
   
March 31, 2008
    
December 31, 2007
  
   
(In Thousands)
  
6.875% senior notes due 2013, net of discount
   $ 755,557     $ 755,401  
6.625% senior notes due 2010
     335,000       335,000  
2.25% convertible senior notes due 2024
     9,647       9,647  
4.75% convertible senior notes due 2023
     730       730  
Capital lease obligations
     8,371       8,823  
Fair value hedge adjustment
     (4,674 )     (5,054 )
          Total debt
     1,104,631       1,104,547  
Amounts due within one year
     (1,899 )     (1,875 )
          Total long-term debt
   $ 1,102,732     $ 1,102,672  

 
 
6
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
The weighted average effective interest rate of the outstanding borrowings was 7.0% at both March 31, 2008 and December 31, 2007, after giving effect to the amortization of the Fair value hedge adjustment. At March 31, 2008, our available liquidity was $489.6 million, comprised of cash and cash equivalents of $391.0 million and $98.6 million availability from our asset-based revolving credit facility.
 
On December 9, 2005, we exercised our right to terminate our interest rate swap agreement on the 6.625% Notes, which we entered into in November 2003, because of anticipated increases in the variable interest rate component of the swap. We paid a $7.9 million termination payment to the swap counterparty on December 13, 2005. The termination payment, which is reflected in the table above as Fair value hedge adjustment, is being amortized into Interest expense through November 15, 2010. For the three months ended March 31, 2008, $0.4 million of the Fair value hedge adjustment was amortized into Interest expense.


(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,
  
   
2008
    
2007
  
   
(In Thousands)
  
Service cost
   $ 2,116     $ 2,438  
Interest cost
     3,999       3,707  
Expected return on plan assets
     (5,713 )     (5,597 )
Recognized loss
     254       772  
Amortization of prior service cost
     10       10  
  Net periodic pension expense
   $ 666     $ 1,330  


For the three months ended March 31, 2008, we did not contribute to the qualified defined benefit pension plan. For the three months ended March 31, 2007, we contributed $0.4 million to the qualified defined benefit pension plan. 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, 2008 and 2007.
 
 
(7)           Other noncurrent liabilities

Other noncurrent liabilities is comprised of the following:

   
March 31, 2008
    
December 31, 2007
  
   
(In Thousands)
  
Reclamation
   $ 146,042     $ 142,213  
Workers' compensation and black lung
     92,101       90,702  
Other postretirement benefits
     142,466       141,087  
Other
     80,390       77,426  
     Total other noncurrent liabilities
   $ 460,999     $ 451,428  

 
 
7
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
 
(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,
  
   
2008
    
2007
  
   
(In Thousands)
  
Self-insured black lung benefits:
            
Service cost
   $ 600     $ 675  
Interest cost
     850       775  
Amortization of actuarial gain
     (875 )     (825 )
   Subtotal black lung benefits expense
     575       625  
Other workers' compensation benefits
     9,131       7,601  
   Total black lung and workers' compensation benefits expense
   $ 9,706     $ 8,226  


Payments for benefits, premiums and other costs related to black lung and workers’ compensation liabilities were $6.5 million and $6.9 million for the three months ended March 31, 2008 and 2007, respectively.


(9)           Other Postretirement Benefits Expense

Net periodic postretirement benefit cost includes the following components:

   
Three Months Ended
  
   
March 31,
  
   
2008
    
2007
  
   
(In Thousands)
  
Service cost
   $ 825     $ 975  
Interest cost
     2,350       2,075  
Recognized loss
     325       475  
Amortization of prior service credit
     (188 )     (200 )
  Net periodic postretirement benefit cost
   $ 3,312     $ 3,325  


Payments for benefits related to postretirement benefit cost were $1.4 million and $1.2 million for the three months ended March 31, 2008 and 2007, respectively.
 
Multi-Employer Benefits

In March 2007, we entered into a settlement agreement with the United Mine Workers of America Combined Benefit Fund that resolved all previous issues related to the calculation of payments. In the first quarter of 2007, we recorded a refund of $3.6 million, with approximately $3.25 million of the refund applied against Cost of produced coal revenue and approximately $0.35 million applied to Interest income.


(10)           Other Items Affecting Net Income

In the first quarter of 2008, we reversed a $4.2 million receivable as a result of the United States Supreme Court reversal of a lower court ruling that had approved a black lung excise tax refund, with $4.2 million recorded against Cost of produced coal revenue.
 
 
(11)           Earnings Per Share
 
    The number of shares of our common stock, $0.625 par value (“Common Stock”) used to calculate basic earnings per share for the three months ended March 31, 2008 and 2007 is based on the weighted average of outstanding shares 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
 
 
8
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
instruments held by our employees and directors during each period and debt securities currently convertible into shares of Common Stock during each period. In accordance with accounting principles generally accepted in the United States, the effect of dilutive securities in the amount of 0.5 million shares and 2.0 million shares of Common Stock was excluded from the calculation of diluted income per common share for the three months ended March 31, 2008 and 2007, respectively, as such inclusion would result in antidilution.

The computations for basic and diluted income per share are based on the following per share information:

   
Three Months Ended
  
   
March 31,
  
   
2008
    
2007
  
   
(In Thousands, Except Per Share Amounts)
  
Numerator:
            
Net income - numerator for basic
   $ 41,934     $ 32,607  
Effect of convertible notes
     50       50  
Adjusted net income - numerator for diluted
   $ 41,984     $ 32,657  
                 
Denominator:
                
Weighted average shares - denominator for basic
     79,768       80,563  
Effect of stock options/restricted stock
     505       161  
Effect of convertible notes
     324       324  
Adjusted weighted average shares - denominator for diluted
     80,597       81,048  
                 
Net income per share:
                
Basic
   $ 0.53     $ 0.40  
Diluted
   $ 0.52     $ 0.40  
 
    The 4.75% Notes are convertible by holders into shares of Common Stock during certain periods under certain circumstances. As of March 31, 2008, the price per share of Common Stock had reached the specified threshold for conversion. Consequently, the 4.75% Notes are convertible until June 30, 2008, the last day of our second quarter. The 4.75% Notes may be convertible beyond this date if the specified threshold for conversion is met in subsequent quarters. As of March 31, 2008, if all of the notes outstanding were eligible and were converted, we would have needed to issue 37,649 shares of Common Stock.
 
    The 2.25% Notes are convertible by holders into shares of Common Stock during certain periods under certain circumstances. The 2.25% Notes were not eligible for conversion at March 31, 2008. As of March 31, 2008, if all of the notes outstanding were eligible and were converted, we would have needed to issue 287,113 shares of Common Stock.


(12)           Contingencies

  Wheeling-Pittsburgh Steel
 
    On April 27, 2005, Wheeling-Pittsburgh Steel Corporation (“WPS”) sued our subsidiary Central West Virginia Energy Company (“CWVE”) in the Circuit Court of Brooke County, West Virginia, seeking (a) an order requiring CWVE to specifically perform its obligations under a Coal Supply Agreement (“CSA”) and (b) compensatory damages due to CWVE’s alleged failure to perform under the CSA and for alleged damages to WPS’s coke ovens. WPS later amended its complaint to add Mountain State Carbon, LLC (“MSC”) as a plaintiff, us as a defendant, and claims for bad faith, misrepresentation and punitive damages.  It is CWVE’s position that its failure to perform was excused due to the occurrence of events that rendered performance commercially impracticable and/or force majeure events as defined by the parties in the CSA, including unforeseen labor shortages, mining and geologic problems at certain of our coal mines, railroad car shortages, transportation problems and other events beyond our control. With respect to the claims based upon alleged bad faith and misrepresentation, and the request for the imposition of punitive damages, it is the position of CWVE and us that no independent tort claim, separate and apart from the breach of contract claims had been alleged against either CWVE or us and, as such, no damages, whether compensatory or punitive, were recoverable. It is also the position of CWVE and us that no acts of bad faith or misrepresentation occurred.
 
 
 
9
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
    On May 29, 2007, the trial commenced.  On July 2, 2007, the jury awarded damages in favor of WPS and MSC in the amount of $219.9 million, comprised of $119.9 million compensatory damages for breach of contract and misrepresentation and $100 million for punitive damages.
 
    On July 30, 2007, a hearing was held by the trial court to review the punitive damages award, and to consider pre-judgment interest and a counterclaim filed by CWVE related to damages for non-payment of the escalated purchase price under the CSA for coal delivered to MSC in November and December 2006.  At the hearing, the trial court awarded WPS and MSC pre-judgment interest of approximately $24 million and awarded CWVE approximately $4.5 million (including pre-judgment interest) on the counterclaim.  On August 2, 2007, the trial court entered the jury award of compensatory and punitive damages, which, including the above mentioned pre-judgment interest of $24 million, totals approximately $240 million (net of the $4.5 million awarded to CWVE).
 
    On September 26, 2007, the trial court held a hearing on the issue of security for the judgment pending appeal to the West Virginia Supreme Court of Appeals (the “WV Supreme Court”). On September 28, 2007, the trial court ordered that a bond be posted in the amount of $50 million.  The $50 million appeal bond was posted with the trial court on October 25, 2007, which stays this matter pending disposition of our appeal.
 
    On December 10, 2007, we and CWVE filed separate “Petitions for Appeal” with the WV Supreme Court seeking, among other things, review of certain rulings made by the trial court and reversal of the judgments against them. The arguments raised on appeal included, among other things, (i) the propriety of allowing WPS to proceed with both contract and tort claims where the tort arose out of performance of the contract, (ii) the propriety of the punitive damages award, (iii) whether WPS proved the elements of its misrepresentation and contract claims, and (iv), the correctness of certain evidentiary rulings.
    
    We believe, in consultation with legal counsel, that we have strong legal arguments to raise on appeal to the WV Supreme Court that create significant uncertainty regarding the ultimate outcome of this matter.  Given the size of the punitive damages awarded, West Virginia case precedent, and the significant legal questions the case presents for appeal, we believe it is probable that the WV Supreme Court will agree to hear our appeal.  Ultimately, we believe it is unlikely any punitive damages will be assessed in this matter.  We further believe in consultation with legal counsel that due to matters of law in the conduct of the recently completed trial, there is a strong possibility that the WV Supreme Court will remand the compensatory damages claim for retrial or significantly reduce the amount of the compensatory damages awarded by the jury.
 
    We believe the range of possible loss in this matter is from $16 million to $244 million, prior to post-judgment interest or other costs. The minimum loss we expect to incur upon final settlement or adjudication is the amount of excess costs incurred by WPS to acquire coal required but not delivered under the CSA (plus pre-judgment interest) adjusted for performance excused by events of force majeure.  Amounts in excess of this amount may ultimately be awarded if the WV Supreme Court upholds the circuit court’s decisions, in whole or in part, or if the WV Supreme Court remands the case for retrial and a jury awards the plaintiffs an amount in excess of what we have accrued. We are unable to predict the ultimate outcome of this matter and believe there is no amount in the range that is a better estimate than any other amount given the various possible outcomes on appeal.  Included in these reasonably possible outcomes are reversal of the compensatory damage and punitive awards, remand and retrial, or reduction of some or all of the awards.  As there is no amount in the range that is a better estimate than any other amount, the minimum amount in the range has been accrued (included in Other current liabilities).  It is reasonably possible that our judgments regarding these matters could change in the near term, resulting in the recording of additional material losses that would affect our operating results and financial position.
 
    We have notified our insurance carriers pursuant to our insurance policies and they are investigating the matter. We believe that we have a valid claim for coverage for at least certain aspects of the underlying litigation. However, we are not able at this time to predict with any degree of certainty the amount of any insurance recovery.  Potential recoveries from our insurance carriers for any losses that we may eventually incur from this matter have not been taken into consideration in determining our accrual for this matter.

 
10
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

    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 (“Harman plaintiffs”) sued A.T. Massey and five of its subsidiaries (“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 April 5, 2007, the WV Supreme Court accepted the Massey Defendants’ Petition for Appeal. Oral arguments were held on October 10, 2007. On November 21, 2007, the WV Supreme Court issued a 3-2 majority opinion reversing the judgment against the Massey Defendants and remanding the case to the Circuit Court of Boone County with directions to enter an order dismissing the case, with prejudice, in its entirety.  The Harman plaintiffs filed motions asking the WV Supreme Court to conduct a rehearing in the case. On January 24, 2008, the WV Supreme Court decided to rehear the case, which was re-argued on March 12, 2008. On April 3, 2008, the WV Supreme Court again reversed the judgment against the Massey Defendants and remanded the case with direction to enter an order dismissing the case, with prejudice, in its entirety. The Harman plaintiffs may petition the United States Supreme Court to review the WV Supreme Court’s dismissal of their claims.  We believe that the United States Supreme Court will refuse to hear their appeal. In the fourth quarter of 2007, we cancelled the contingent letter of credit of $55 million securing the appeal bond and reversed the accruals of $22 million previously recorded in Cost of produced coal revenue and $11.6 million in Interest expense.

West Virginia Flooding
 
        Since July 2001, we and nine of our subsidiaries have been sued in 17 consolidated civil actions filed in the Circuit Courts of Boone, Fayette, Kanawha, McDowell, Mercer, Raleigh and Wyoming Counties, West Virginia, for alleged property damages and personal injuries arising out of flooding on or about July 8, 2001. Along with 32 other consolidated cases not involving us or our subsidiaries, these cases cover approximately 4,300 plaintiffs seeking unquantified compensatory and punitive damages from approximately 200 defendants. The WV Supreme Court transferred all 49 cases (the “Referred Cases”) to the Circuit Court of Raleigh County, West Virginia, to be handled by a mass litigation panel of three judges. The panel judges will hold multiple trials, each relating to all or part of a watershed. On January 18, 2007, a panel judge dismissed all claims asserted by all plaintiffs within the Coal River watershed, which directly involves approximately 400 plaintiffs and we believe impacts another 800 plaintiffs. Plaintiffs filed a petition seeking appeal of this decision with the WV Supreme Court, which was granted on October 24, 2007. The WV Supreme Court heard the appeal on April 16, 2008, which we believe will be decided in 2008. We believe we have insurance coverage applicable to these matters. 
 
        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 355 plaintiffs seeking unquantified compensatory and punitive damages from approximately 35 defendants.
 
        Since May 2006, we and twelve of our subsidiaries have been sued in three civil actions filed in the Circuit Courts of Logan and Mingo Counties, West Virginia, for alleged property damages and personal injuries arising out of flooding between May 30 and June 4, 2004. Four of our subsidiaries have been dismissed from one of the Logan County cases.  These complaints cover approximately 425 plaintiffs seeking unquantified compensatory and punitive damages from approximately 52 defendants. Two of these cases (both in Logan County) have been stayed pending appeal of the Coal River watershed decision noted above. In the Mingo County case, a motion to stay pending appeal of the Coal River watershed decision has been made.
 
     On April 10, 2007, two of our subsidiaries were sued in a civil action filed in the Circuit Court of Boone County, West Virginia, for alleged property damages and personal injuries arising out of flooding on or about July 29, 2001. This complaint covers 17 plaintiffs seeking unquantified compensatory and punitive damages from five defendants.  On November 6, 2007, we filed a motion to dismiss, or in the alternative, to certify questions to the WV Supreme Court in response to the complaint.  Subsequently, we settled with 16 of 17 of the plaintiffs.  With respect to the remaining plaintiff, the trial court granted a motion to withdraw filed by the plaintiff’s counsel and the plaintiff has yet to notify the trial court as to whether the plaintiff intends to prosecute such claims.  We are pursuing dismissal on the grounds initially asserted in the pending motion to dismiss.
 
We believe these matters will be resolved without a material impact on our cash flows, results of operations or financial condition.
 
 
11
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
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 us and 15 of our subsidiaries. The claims against us and three of our subsidiaries were dismissed. Plaintiffs alleged that we and our subsidiaries named in the suit 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 unquantified compensatory and punitive damages. The WV Supreme Court referred the consolidated lawsuits, and three similar lawsuits against other coal and transportation companies not involving us or our subsidiaries, to the Circuit Court of Lincoln County, West Virginia, to be handled by a mass litigation panel of one judge. Plaintiffs filed motions requesting class certification. On June 7, 2007, plaintiffs voluntarily dismissed their public nuisance claims seeking monetary damages for road and bridge repairs. Defendants filed a motion requesting that the mass litigation panel judge recommend to the WV Supreme Court that the cases be sent back to the circuit courts of origin for resolution. The WV Supreme Court has not ruled on that motion.  Defendants have moved to dismiss any remaining public nuisance claims and to limit any damages for nuisance to two years prior to the filing of any suit.  Prior to the hearing on those motions, plaintiffs agreed to an order limiting any damages for nuisance to two years prior to the filing of any suit. The motion to dismiss any remaining public nuisance claims was resisted by plaintiffs and argued at a hearing on December 14, 2007. As of May 8, 2008, no date has been set for trial.  We believe we have insurance coverage applicable to these matters and that they will be resolved without a material impact on our cash flows, results of operations or financial condition.
 
Well Water Contamination
 
        Since September 2004, approximately 710 plaintiffs filed approximately 400 suits against us and our subsidiary Rawl Sales & Processing Co. in the Circuit Court of Mingo County, West Virginia, for alleged property damage and personal injuries arising out of slurry injection and impoundment practices allegedly contaminating plaintiffs’ water wells. Subsequent to such filings, approximately 55 suits have either been voluntarily dismissed by the plaintiffs or dismissed by the trial court. Plaintiffs seek injunctive relief and unquantified compensatory and 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 are claiming entitlement to medical monitoring for the next 30 years. While we have not received damage amounts for all plaintiffs at this time, we estimate that plaintiffs will claim in excess of $50 million in special damages. Plaintiffs also request unliquidated compensatory damages for pain and suffering, annoyance and inconvenience.  Trial is scheduled to commence on May 27, 2008. We believe we have strong defenses to these claims. While we currently are in discussions concerning coverage with certain of our insurers, we believe we have insurance coverage applicable to these matters and that they will be resolved without a material 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 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 (“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 have appealed both rulings to the Fourth Circuit Court. The hearing is currently set for September 2008, but we have filed an unopposed motion with the Fourth Circuit Court asking for an earlier hearing. We do not expect any material impact to our financial statements through 2009 and will continue to monitor developments in the matter.
 
    Clean Water Act
 
      On May 10, 2007, the United States, on behalf of the Administrator of the United States Environmental Protection Agency (“EPA”), filed suit against us and twenty-seven of our subsidiaries in the District Court.  The suit alleged that a number of our subsidiaries violated the Federal Clean Water Act on thousands of occasions by discharging pollutants in excess of monthly and daily permit limits from 2000 to 2006.  On January 17, 2008, a proposed settlement reached with the EPA was filed with the District Court. The settlement, which requires District Court approval, requires us to pay $20 million in penalties and make improvements in our environmental processes. The settlement was approved by the District Court on April 9, 2008, and was paid on May 8, 2008. We recorded the $20 million in Cost of produced coal revenue in 2007.
 
 
12
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
 
Aracoma Mine Fire

In January 2006, one of our subsidiaries, Aracoma Coal Company (“Aracoma”), experienced a mine fire that resulted in the deaths of two miners. The estates of the two miners have filed a lawsuit in the Circuit Court of Logan County against us and two of our subsidiaries with respect to the incident. A trial in that suit is scheduled for October 2008. We believe we have insurance coverage applicable to this matter.

The Federal Mine Safety and Health Administration conducted an investigation into the causes of the fatalities and subsequently issued citations seeking $1.5 million in fines relating to the fatalities. Aracoma has appealed those citations.

Additionally, the United States Attorney’s Office in the Southern District of West Virginia is conducting a federal grand jury investigation of the incident. Such an investigation could result in criminal fines for Aracoma or other subsidiaries of ours.

While we believe we have sufficient legal reserves for these matters, it is possible that the actual outcome of the matters could vary significantly from those amounts. We will continue to review the amount of our accrual and any adjustment required to increase or decrease the accrual based on development of the matters will be made in the period determined. We believe these matters will be resolved without a material impact on our cash flows, results of operations or financial condition.

 Other Legal Proceedings
 
      We are parties to a number of other legal proceedings, incident to our normal business activities. These include contract dispute, personal injury, property damage and employment matters. While we cannot predict the outcome of these proceedings, based on our current estimates we do not believe that any liability arising from these matters individually or in the aggregate should have a material impact upon our consolidated cash flows, results of operations or financial condition. It is reasonably possible, however, that the ultimate liabilities in the future with respect to these lawsuits and claims, in the aggregate, may be material to our cash flows, results of operations or financial condition.


(13)           Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). In February 2008, the FASB issued FASB Staff Position 157-2, Partial Deferral of the Effective Date of SFAS 157, which delayed the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities.  We adopted SFAS 157, effective January 1, 2008 for financial assets and financial liabilities. The adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our financial position or results of operations.  We continue to evaluate the application of Statement 157 for nonfinancial assets and liabilities but do not believe that it will significantly impact our financial position and results of operations.  See Note 14 for more information on SFAS 157.

 In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Liabilities – Including an amendment of FASB Statement No. 115” (“SFAS 159”).    SFAS 159 permits entities to choose to measure certain financial assets and liabilities at fair value (the “fair value option”).  Unrealized gains and losses, arising subsequent to the election of the fair value option, are reported in earnings.  We adopted SFAS 159 effective January 1, 2008.  We have not elected the fair value option for existing assets or liabilities upon adoption. Therefore, the implementation of SFAS 159 did not have an effect on our results of operations or financial position.
 

 
13
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)

(14)           Fair Value of Financial Instruments

On January 1, 2008, we adopted SFAS 157, which requires the categorization of financial assets and liabilities based upon the level of judgments associated with the inputs used to measure their fair value.  Hierarchical levels – defined by SFAS 157 and 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.


   
March 31, 2008
  
   
(In Thousands)
  
   
Level 1
    
Level 2
    
Level 3
    
Total
  
Fixed income securities
   $ 13,039     $ -     $ -     $ 13,039  
Money market funds
     486,341       -       -       486,341  
Total securities
   $ 499,380     $ -     $ -     $ 499,380  


All investments in money market funds are cash equivalents or deposits pledged as collateral and are primarily invested in two money market funds.  All fixed income securities are deposits supporting various regulatory obligations.  See Note 3 for more information on deposits.




* * * * * * * *

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, 2007.

FORWARD-LOOKING INFORMATION

From time to time, Massey Energy Company, which includes its direct and wholly owned subsidiary, A.T. Massey Coal Company, Inc, and its direct and indirect wholly owned subsidiaries (“we,” “our,” “us”), makes 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 “believe,” “anticipate,” “expect,” “estimate,” “intend,” “may,” “plan,” “project,” “will” and similar 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 obligation to update these forward-looking statements unless required by securities law, and we caution the reader not to rely on them unduly.
 
 
14
 
We have based any forward-looking statements we have made on our current expectations and assumptions about future events and circumstances that are subject to risks, uncertainties and contingencies that could cause results to differ materially from those discussed in the forward-looking statements, including, but not limited to:
 
 
(i)
  
our cash flows, results of operation or financial condition;
 
(ii)
  
the consummation of acquisition, disposition or financing transactions and the effect thereof on our business;
 
(iii)
  
governmental policies and regulatory actions affecting the coal industry;
 
(iv)
  
legal and administrative proceedings, settlements, investigations and claims and the availability of insurance coverage related thereto;
 
(v)
  
weather conditions or catastrophic weather-related damage;
 
(vi)
  
our ability to produce coal to meet market expectations and customer requirements;
 
(vii)
  
our ability to obtain coal from brokerage sources or contract miners in accordance with their contracts;
 
(viii)
  
our ability to obtain and renew permits necessary for our existing and planned operations in a timely manner;
 
(ix)
  
the availability of transportation for our produced coal;
 
(x)
  
the expansion of our mining capacity;
 
(xi)
  
our ability to manage production costs, including labor costs;
 
(xii)
  
adjustments made in price, volume or terms to existing coal supply agreements;
 
(xiii)
  
the market demand for coal, electricity and steel;
 
(xiv)
  
concerns about the environmental impact of coal combustion and the cost and perceived benefits of alternative sources of energy such as natural gas and nuclear energy;
 
(xv)
  
competition among coal and other energy producers, in the United States and internationally;
 
(xvi)
  
our ability to timely obtain necessary supplies and equipment;
 
(xvii)
  
our reliance upon and relationships with our customers and suppliers;
 
(xviii)
  
the creditworthiness of our customers and suppliers;
 
(xix)
  
our ability to attract, train and retain a skilled workforce to meet replacement or expansion needs;
 
(xx)
  
our assumptions and projections concerning economically recoverable coal reserve estimates;
 
(xxi)
  
future economic or capital market conditions and foreign currency fluctuations;
 
(xxii)
  
the availability and costs of credit, surety bonds and letters of credit that we require;
 
(xxiii)
  
the lack of insurance against all potential operating risks;
 
(xxiv)
  
our assumptions and projections regarding pension and other post-retirement benefit liabilities;
 
(xxv)
  
our interpretation and application of accounting literature related to mining specific issues; and
 
(xxvi)
  
the successful implementation of our strategic plans and objectives, including our recently announced expansion plans.
 
 
 
15
 
    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, 2007. 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.
 
 
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 Securities and Exchange Commission (“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, 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.
 
 
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 of non-strategic assets and miscellaneous income.  
 
    We reported after-tax earnings for the first quarter of $41.9 million, or $0.52 per diluted share, compared to after-tax earnings of $32.6 million, or $0.40 per share, for the comparable period in 2007. Results for the first quarter of 2008 included a $13.6 million pre-tax gain ($0.13 per basic share) on an exchange of coal reserves.
 
    Produced tons sold were 9.6 million in the quarter, compared to 9.9 million in the first quarter of 2007. Shipments for the first quarter of 2007 were negatively impacted by lower production and tight availability of rail cars in February and March.  We produced 10.0 and 10.5 million tons in the first quarter of 2008 and 2007, respectively. Exports were 1.8 and 1.3 million tons in the first quarter of 2008 and 2007, respectively.

During the first quarter of 2008, Produced coal revenue increased by 4.5% over the prior year first quarter despite lower shipments as we benefited from higher utility, metallurgical and industrial coal sales prices secured in new coal sales agreements as lower-priced contracts expired. Our average Produced coal revenue per ton sold in the first quarter of 2008 increased by 7.8% to $56.36 compared to $52.26 in the first quarter of 2007. Our average Produced coal revenue per ton in the first quarter of 2008 for metallurgical tons sold increased by 9.4% to $80.63 from $73.68 in the first quarter of 2007.

Our Average cash cost per ton sold (see Note below) was $45.62, compared to $42.36 in the previous year’s first quarter. The increased cost level is primarily due to higher diesel cost, increased sales-related costs from the growth in average per ton realization, higher labor costs, the impact of the idling a large shovel, which is being moved to another mine, and two longwall moves, and an unfavorable ruling on black lung excise tax.

In April 2008, we announced that we were accelerating some of our expansion plans by increasing our capital spending related to these expansion plans by $90 million. Our internal expansion and cost reduction plan anticipates developing net additional annual production of up to 10 million tons in 2010 versus 2007, with the ramp up occurring during 2008 to 2010. Additionally, these new tons will be weighted towards metallurgical coal production, which we believe will be cost advantaged versus existing comparable quality competitor production. We expect to fund all of our expansion projects out of existing liquidity and operating cash flow generated from 2008 to 2010.

 
16
___________
 
Note: Average cash cost per ton is calculated as the sum of Cost of produced coal revenue and Selling, general and administrative expense (excluding Depreciation, depletion and amortization), divided by the number of produced tons sold. Although Average cash cost per ton is not a measure of performance calculated in accordance with accounting principles generally accepted in the United States (“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,
    
March 31,
     
2008
    
2007
     
$
  
per ton
    
$
  
per ton
     
(In Millions, Except Per Ton Amounts)
Total costs and expenses
  
$
575.6
      
$
551.7
    
Less: Freight and handling costs
    
65.0
        
43.9
    
Less: Cost of purchased coal revenue
    
9.9
        
22.1
    
Less: Depreciation, depletion and amortization
    
60.2
        
62.1
    
Less: Other expense
    
0.8
        
2.4
    
Average cash cost
  
$
439.7
  
 $45.62
  
 $
421.2
  
 $42.36

 
17

 
RESULTS OF OPERATIONS

Three months ended March 31, 2008 compared to three months ended March 31, 2007

Revenues


   
Three Months Ended
              
   
March 31,
              
               
Increase
    
% Increase
  
   
2008
    
2007
    
(Decrease)
    
(Decrease)
  
   
(In Thousands)
      
Revenues
                        
Produced coal revenue
   $ 543,231     $ 519,693     $ 23,538      
5%
  
Freight and handling revenue
     65,042       43,852       21,190      
48%
  
Purchased coal revenue
     10,674       25,174       (14,500 )    
(58)%
  
Other revenue
     25,678       18,601       7,077      
38%
  
Total revenues
   $ 644,625     $ 607,320     $ 37,305      
6%
  

 
    The following is a breakdown by market served of the changes in produced tons sold and average produced coal revenue per ton sold for the first quarter of 2008 compared to the first quarter of 2007:


   
Three Months Ended March 31,
              
 
  
2008
    
2007
    
Increase (Decrease)
    
% Increase (Decrease)
  
   
        (In Millions, Except Per Ton Amounts)
      
Produced tons sold:
                        
   Utility
     6.3       6.6       (0.3 )    
(5)%
  
   Metallurgical
     2.3       2.3       0.0      
0%
  
   Industrial
     1.0       1.0       0.0      
0%
  
     Total
     9.6       9.9       (0.3 )    
(3)%
  
                                 
Produced coal revenue per ton sold:
                                
   Utility
   $ 47.89     $ 45.01     $ 2.88      
6%
  
   Metallurgical
     80.63       73.68       6.95      
9%
  
   Industrial
     55.21       51.08       4.13      
8%
  
     Weighted average
   $ 56.36     $ 52.26     $ 4.10      
8%
  

 
    The improvement in average per ton sales price is attributable to increased worldwide demand for utility and metallurgical grades of coal produced in the U.S. The higher demand has resulted in shortages of certain grades of coal, increasing the market prices of these grades of coal, and allowing us to negotiate agreements containing higher price terms as lower-priced contracts expired.
 
    Purchased coal revenue decreased mainly due to a decrease in purchased tons sold from 0.5 million in the first quarter of 2007 to 0.2 million in the first quarter of 2008. We purchase varying amounts of coal each quarter to supplement produced coal sales.
 
    Freight and handling revenue primarily increased due to an increase in export shipping from 1.3 million tons in the first quarter of 2007 to 1.8 million tons in the first quarter of 2008. Another portion of the increase was due to higher freight rates in 2008 versus 2007.
 
    Other revenue, which includes refunds on railroad agreements, royalties related to coal lease agreements, gas well revenue, gains on the sale of non-strategic assets, coal reserve exchanges, joint venture revenue and other miscellaneous revenue, increased to $25.7 million for the first quarter of 2008 from $18.6 million for the first quarter of 2007 due primarily to a $13.6

 
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million pre-tax gain on an exchange of coal reserves in 2008, offset by income from synfuel production operations in 2007 of $3.8 million. The synfuel production facility was shut down on December 31, 2007, when the Internal Revenue Code Section 45 credits expired.

Costs


   
Three Months Ended
              
   
March 31,
              
               
Increase
    
% Increase
  
   
2008
    
2007
    
(Decrease)
    
(Decrease)
  
   
(In Thousands)
      
Costs and expenses
                        
Cost of produced coal revenue
   $ 418,227     $ 402,517     $ 15,710      
4%
  
Freight and handling costs
     65,042       43,852       21,190      
48%
  
Cost of purchased coal revenue
     9,864       22,160       (12,296 )    
(55)%
  
Depreciation, depletion and amortization, applicable to:
                          
Cost of produced coal revenue
     59,348       61,337       (1,989 )    
(3)%
  
Selling, general and administrative
     904       812       92      
11%
  
Selling, general and administrative
     21,479       18,689       2,790      
15%
  
Other expense
     786       2,396       (1,610 )    
(67)%
  
Total costs and expenses
   $ 575,650     $ 551,763     $ 23,887      
4%
  

 
    Cost of produced coal revenue on a per ton of coal sold basis increased 7% in the first quarter of 2008 compared with the first quarter of 2007. The increased cost level is primarily due to higher diesel cost, increased sales-related costs from the growth in average per ton realization, higher labor costs, the impact of idling a large shovel that is being moved to another mine, and two longwall moves, and an unfavorable ruling on black lung excise tax. Tons produced in the first quarters of 2008 and 2007 were 10.0 and 10.5 million, respectively.
 
    Cost of purchased coal revenue decreased mainly due to a decrease in purchased tons sold from 0.5 million in the first quarter of 2007 to 0.2 million in the first quarter of 2008.
 
    Freight and handling revenue primarily increased due to an increase in export shipping from 1.3 million tons in the first quarter of 2007 to 1.8 million tons in the first quarter of 2008. Another portion of the increase was due to higher freight rates in 2008 versus 2007.

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 2007 to the first quarter of 2008 is primarily the result of differences in pre-tax income, the impact of percentage depletion, and projected changes in temporary taxable and deductible differences. Also impacting the first quarter 2008 income tax rate was a favorable adjustment for interest received from the IRS in connection with the closing of a prior period audit.


LIQUIDITY AND CAPITAL RESOURCES
 
    At March 31, 2008, our available liquidity was $489.6 million, comprised of Cash and cash equivalents of $391.0 million and $98.6 million of availability from our asset-based revolving credit facility. The total debt-to-book capitalization ratio was 56.8% at March 31, 2008.

 
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    Our debt is comprised of the following:


   
March 31, 2008
    
December 31, 2007
  
   
(In Thousands)
  
6.875% senior notes due 2013, net of discount
   $ 755,557     $ 755,401  
6.625% senior notes due 2010
     335,000       335,000  
2.25% convertible senior notes due 2024
     9,647       9,647  
4.75% convertible senior notes due 2023
     730       730  
Capital lease obligations
     8,371       8,823  
Fair value hedge adjustment
     (4,674 )     (5,054 )
          Total debt
     1,104,631       1,104,547  
Amounts due within one year
     (1,899 )     (1,875 )
          Total long-term debt
   $ 1,102,732     $ 1,102,672  

 
    We believe that as of March 31, 2008, we were, and currently are, in compliance with all of our debt covenants.

Cash Flow

    Net cash provided by operating activities was $137.4 million for the first three months of 2008 compared to $94.0 million for the first three months of 2007. 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 $122.2 million and $57.8 million for the first three months of 2008 and 2007, respectively. The cash used in investing activities reflects capital expenditures in the amount of $123.5 million and $59.9 million for the first three months of 2008 and 2007, respectively. These capital expenditures are for replacement of mining equipment, the expansion of mining and shipping capacity, and projects to improve the efficiency of mining operations. Additionally, the first three months of 2008 and 2007 included $1.4 million and $2.1 million, respectively, of proceeds provided by the sale of assets.
 
    Financing activities for the first three months of 2008 and 2007 primarily reflect changes in debt levels, as well as the exercising of stock options and payments of dividends. Net cash provided by financing activities was $10.6 million for the first three months of 2008 while net cash utilized by financing activities was $4.2 million for the first three months of 2007.
 
    We believe that cash on hand, cash generated from operations and our borrowing capacity will be sufficient to meet our working capital requirements, scheduled debt payments (other than future maturities of our senior notes, which we expect to refinance), potential share repurchases, anticipated dividend payments, expected settlements and final awards of outstanding litigation, and anticipated capital expenditures including planned expansions (other than major acquisitions) for at least the next few years. Nevertheless, our ability to satisfy our debt service obligations, repurchase shares, pay dividends, pay settlements and final awards of outstanding litigation, or fund planned capital expenditures including planned expansions, will substantially depend upon our future operating performance, which will be affected by prevailing economic conditions in the coal industry, debt covenants, and financial, business and other factors, some of which are beyond our control. We frequently evaluate potential acquisitions. In the past, we have funded acquisitions primarily with cash generated from operations, but we may consider a variety of other sources, depending on the size of any transaction, including debt or equity financing. Additional capital resources may not be available to us on terms that we find acceptable, or at all.
 
 
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CERTAIN TRENDS AND UNCERTAINTIES

In addition to the 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, 2007, for a discussion of certain trends and uncertainties that may impact our business.

The planned expansion of our coal production involves a number of risks, any of which could cause us not to realize the anticipated benefits.

In October 2007, we announced plans to expand production at our Central Appalachian coal mining operations during the next two years.  In April 2008, we announced that we were accelerating some of our expansion plans by increasing our capital spending related to these expansion plans by $90 million. Our internal expansion and cost reduction plan anticipates developing net additional annual production of up to 10 million tons in 2010 versus 2007, with the ramp up occurring during 2008 to 2010. Additionally, these new tons will be weighted towards metallurgical coal production, which we believe will be cost advantaged versus existing comparable quality competitor production. We expect to fund all of our expansion projects out of existing liquidity and operating cash flow generated from 2008 to 2010.  If we are unable to successfully expand our coal production, our profitability may decline and we could experience a material adverse effect on our cash flows, results of operations or financial condition. These expansion plans involve certain risks and uncertainties, including:

  
•
the accuracy of our assumptions of the recoverability of the coal reserves to be mined;

 
•
the availability of skilled labor to staff the new and expanded mines;

 
•
the availability and cost of the capital equipment required for each of the new and expanded mines; and

 
•
unanticipated changes in business, industry or general economic conditions that affect the assumptions underlying our rationale for expanding our production.

Any one or more of these factors could cause us not to realize the benefits we anticipate will result from our expansion plans. Our expansion plans could materially affect our liquidity and capital resources and may require us to incur indebtedness, seek equity, capital or both.


OFF-BALANCE SHEET ARRANGEMENTS
 
    In the normal course of business, we are a party to certain off-balance sheet arrangements including guarantees, operating leases, indemnifications, and financial instruments with off-balance sheet risk, such as bank letters of credit and performance or surety bonds. Liabilities related to these arrangements are not reflected in our 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, 2008, we had $119.2 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 $74.2 million was issued under our asset based lending arrangement. No claims were outstanding against those letters of credit as of March 31, 2008.

On January 22, 2008, a settlement was reached regarding our previously reported disagreement and protest of a new actuarial methodology being applied by the Office of Workers’ Claims (“OWC”) for the Commonwealth of Kentucky in determining levels of surety against potential future claims.  The settlement resulted in the dismissal of our cases pending in the Franklin County Circuit Court of Kentucky and required us to post additional surety of $11.5 million for the 2006 and 2007 assessments against potential claims. That additional surety requirement was satisfied with the posting of a letter of credit issued under our asset-based lending arrangement.
 
We use surety bonds to secure reclamation, workers’ compensation, wage payments, and other miscellaneous obligations. As of March 31, 2008, we had $362.1 million of outstanding surety bonds. These bonds were in place to secure obligations as follows: post-mining reclamation bonds of $302.7 million, an appeal bond of $50.0 million, and other miscellaneous obligation bonds of $9.4 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, 2008 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, 2007, for a discussion of our critical accounting estimates and assumptions.
 
 
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RECENT ACCOUNTING DEVELOPMENTS
 
    In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). In February 2008, the FASB issued FASB Staff Position 157-2, Partial Deferral of the Effective Date of SFAS 157, which delayed the effective date of SFAS 157 for all nonrecurring fair value measurements of nonfinancial assets and nonfinancial liabilities.  We adopted SFAS 157, effective January 1, 2008, for financial assets and financial liabilities.  SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosure of fair value measurements.  SFAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability.  The adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our financial position or results of operations (see Note 14 in Notes to Condensed Consolidated Financial Statements).  We continue to evaluate the application of Statement 157 for nonfinancial assets and liabilities but do not believe that it will significantly impact our financial position and results of operations.


Item 3:  QUANTITATIVE AND QUALITATIVE DISCUSSIONS ABOUT MARKET RISK

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, 2007, for a discussion of certain market risk factors, which may impact our business. There has been no significant change to our market risk exposures for the three months ended March 31, 2008.


Item 4:  CONTROLS AND PROCEDURES
 
    Pursuant to Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, with the participation of our management, including our Chief Executive Officer (“CEO”), who is our principal executive officer, and Chief Financial Officer (“CFO”), who is our principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
 
    There has been no change in our internal control over financial reporting during the three months ended March 31, 2008, 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

      Information responsive to this Item 1. is contained in Note 12, “Contingencies,” of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q and in Part I Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2007, which are incorporated herein by reference.
 
 
Item 1A. Risk Factors
 
    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, 2007, 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, 2007.
 
 
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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 2008.


Period
  
Total Number of Shares Purchased
    
Average Price Paid per Share
    
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)
    
Maximum Number of Shares that May Yet Be Purchased Under the Plan
    
   
(In Thousands, Except Average Price Paid Per Share)
    
Jan. 1 through Jan. 31
     -       -       -       -    
Feb. 1 through Feb. 28
     -       -       -       -    
Mar. 1 through Mar. 31
     -       -       -       -    
Total
     -               -       8,025,989  
(2)
______
     
(1)
  
The Repurchase Program was authorized by the Board of Directors and announced on November 14, 2005 for an aggregate amount not to exceed $500 million. The Repurchase Program does not require us to acquire any specific number of shares and may be terminated at any time.

(2)
  
Calculated using $420 million that may yet be purchased under our share repurchase program and $52.33, the closing price of Common Stock as reported on the New York Stock Exchange on April 30, 2008.

 
Item 6. Exhibits

10.1
Third Amendment to Amended and Restated Credit Agreement [filed as Exhibit 10.1 to Massey’s current report on Form 8-K filed March 14, 2008 and incorporated by reference]
 
31.1
Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2
Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
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.
 
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.

 
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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:  May 9, 2008
  
 
/s/ E. B. Tolbert                                
 
E. B. Tolbert,
 
Vice President and
 
Chief Financial Officer
   
 
/s/ D. W. Owings                                
 
D. W. Owings,
 
Controller






 
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