Don L. Blankenship President and Chief Executive Officer A.T. Massey Coal

Through Massey’s strategy of investment in new high-quality reserves and modern mining equipment and procedures, it has delivered an enviable record of consistent double-digit earnings growth for a number of years. However, extremely difficult market conditions prevailed in 1999, which resulted in an earnings decline for the first time in many years. Nevertheless, Massey continued to significantly outperform its industry peers on virtually every measurable criteria.

For the year, Massey generated operating profit of $147 million, consistent with our expectations, but down from $173 million in 1998. Massey implemented aggressive actions to reduce costs in 1999 to offset unfavorable market conditions and continues to focus on strategies that will maintain or increase its competitive advantage. Total coal sales volume of 37.9 million tons in 1999 was essentially flat compared with the previous year, but lower realized prices and a less favorable sales mix more than offset continued productivity improvements and cost reduction.

Global economic conditions in 1999 created unfavorable currency exchange rates which caused U.S. metallurgical exports to be non-competitive and also attracted increased imports of cheap foreign steel. This reduced sales volumes for U.S. steel producers, lowering domestic demand for metallurgical coal and causing Massey’s export sales to decline to 4 million tons in 1999 from 5.6 million tons last year. As a result, Massey’s metallurgical coal sales declined 18 percent to 14.9 million tons. Realized prices for metallurgical coal sales declined 2 percent to $32.34 per ton in 1999. Volume and price declines in higher-margin metallurgical coal were the most significant factors in lowering Massey’s operating margin in 1999 to 13.6 percent, compared with 15.3 percent last year.

Despite diminished export opportunities, Massey successfully increased its metallurgical coal shipments to Canada and concentrated on the European steel producer market where its high-volatile metallurgical coal retains a distinct quality advantage.

Signs of economic recovery in Asia, along with strengthening foreign currency exchange rates, suggests the flow of cheap steel into the U.S. market may diminish and demand should begin to recover in traditional geographic markets. As a result, near-term demand for U.S. metallurgical coal is expected to stabilize and prices appear to be firming. Renewed growth will be a function of continued improvement in global economic conditions and Massey’s ability to increase its market share through its product quality, service, reliability of supply, and price.

	ELK RUN COAL
	With an annual shipping capacity of more than nine million tons, the Elk Run operating subsidiary in Sylvestor, West Virginia, is Massey Coal’s largest shipping facility.

Massey faced significant challenges in the domestic market for steam coal as well. Deregulation of the electric-generating industry and implementation of Phase II of the Clean Air Act have been widely anticipated to create additional demand for low-sulfur steam coal. Unfortunately, increased pressure to switch to alternative fuel sources such as gas, significant increases in Central Appalachian coal production capacity in anticipation of demand growth, mild weather that has limited demand for electricity, and greater-than-expected penetration of Eastern coal markets by Western coal producers, all have combined to produce a flat market with declining prices. Within this market environment, Massey increased its steam coal sales by 18 percent to 22.9 million tons, while realized prices declined 4 percent to $25.83 per ton.

Massey continues to capitalize on attractive opportunities in the niche industrial coal sales market. Massey has significantly increased its industrial coal sales market share through partnering with key customers on coal handling facility improvements. The facility upgrades are designed to reduce coal costs for the customer and enhance sales volume for Massey.

While declining steam coal prices and difficult market conditions continue to present challenges to the U.S. coal market, Massey’s significant cost advantage over its Central Appalachian competitors positions it not only to withstand hard times, but potentially to capitalize on them. With the exception of Massey, most Central Appalachian coal producers are heavily in debt and are delivering poor financial performance. The prospect that many of these producers will not be able to continue to sell coal below their production costs will likely result in reduced supply and create opportunities for Massey to increase its market share.

Massey has widened its substantial cost advantage over the past several years through a highly focused strategy of reserve acquisitions and investment to continually lower production costs. Given the difficult and rapidly changing market environment, Massey has undertaken additional actions to further reduce costs and maintain or increase its competitive advantage.

Anticipating reduced near-term market demand, Massey curtailed its capital investment plans for new production capacity in 1999 and expects to further reduce its capital spending in 2000. Current efforts are directed at optimizing production from existing mines with the lowest production costs.

Although reserve acquisitions in 1999 consisted of relatively small properties, total reserves increased 14 percent to 2.1 billion tons, as additional reserves were proven up on existing properties. Two significant mine projects were completed in 1999, which continued the strategy to develop previously acquired high-value reserves.

	NICHOLAS ENERGY
	The new Alex Energy surface mine, which began production in 1999, is located at Massey’s Nicholas Energy operating subsidiary in Summersville, West Virginia.

Massey achieved startup of the Justice longwall during the year, its second state-of-the-art longwall operation. Justice has an annual capacity of 4 million tons. A longwall mining system greatly increases productivity and reserve recovery in large underground coal seams. Additionally, production from the new Alex Energy surface mine began in 1999, with an annual production capacity of approximately 3 million tons per year. Surface mines offer the advantage of lower costs compared with traditional underground mines, and even surpass the highly efficient longwall operations in cost efficiency. Including these two new mining operations, 43 percent of Massey’s 1999 production came from mining operations that have cost advantages over most traditional underground continuous mining methods.

Despite the increased challenges presented by coal market conditions in 1999, a key strength of Massey has been its ability to change in response to a changing global business environment. It has prospered and grown despite several years of a slowly declining coal market by being willing to be different from its competitors.

Worker safety continues to be of paramount importance at Massey and is reinforced by a Safety First (S-1) program that exceeds federal and state requirements. Massey’s safety performance, already nearly two times better than the industry average, further improved in 1999 to 2.4 non-fatal days lost incidence rate from 3.1 last year. Massey’s S-1 program provides for ongoing reviews of all aspects of coal mining and processing, and every Massey operation must pass rigorous safety audits. Massey rates itself against the highest standards in its industry and works with manufacturers and suppliers to design safety into the equipment, gear and tools used daily in its operations.


Operating Statistics

Year ended October 31,	1999	1998	1997	1996	1995
(in thousands/in thousands of short tons)
Coal Revenues Operating profit Produced coal sold --Steam coal --Metallurgical coal	$1,083,030 $146,857 22,916 14,948	$1,127,297 $172,762 19,398 18,210	$1,081,026 $154,766 19,300 16,343	$960,827 $134,526 17,520 13,571	$849,758 $111,033 15,777 11,633
--Total produced coal sold Total employees	37,864 3,190	37,608 3,094	35,643 2,968	31,091 2,809	27,410 2,479

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