This article originally provided by The Post-Gazette

February 17, 2008

Heard Off the Street: Massey Energy estimates $240 million judgment will cost it $16 million

Sunday, February 17, 2008
By Len Boselovic, Pittsburgh Post-Gazette

When Massey Energy [Ticker: MEE] Chairman and Chief Executive Officer Don Blankenship went over the Richmond, Va., company's fourth-quarter and 2007 results with analysts recently, most of the questions he fielded concerned the outlook for coal prices, operating costs and production levels.

None of the analysts inquired about the goings on at the West Virginia Supreme Court, where Mr. Blankenship's close relationship with Chief Justice Elliott Maynard and the more than $3 million Mr. Blankenship spent to help defeat another justice's opponent in 2004 have raised serious questions about whether companies that have won more than $300 million in judgments against Massey can get a fair hearing at the state's highest court.

Analysts justifiably are more interested in Massey's numbers than they are in pictures of Mr. Blankenship vacationing on the French Riviera in July 2006 with Chief Justice Maynard. But a number no one on the Feb. 1 conference call expressed any interest in was the $16 million Massey reserved following a $240 million jury verdict in July against the coal company and in favor of Wheeling-Pittsburgh Steel.

Massey has appealed the verdict to the Supreme Court, which is rehearing another case involving Massey after allegations of impropriety were lodged with the court. That case involves the appeal of a $75 million judgment Massey was ordered to pay Hugh Caperton and his Harman Mining Corp. in 2002. The Supreme Court overturned the verdict in November by a 3-2 majority. Chief Justice Maynard and Justice Brent Benjamin, the beneficiary of Mr. Blankenship's campaign spending in 2004, were among those backing Massey.

After the photos of Mr. Blankenship and Chief Justice Maynard were disclosed last month, the court decided to rehear the Harman case and Chief Justice Maynard recused himself from both cases. Justice Benjamin was asked to recuse himself from the Wheeling-Pitt case last week, something he declined to do in the Harman matter. On Friday, Justice Larry Starcher, a vocal critic of Mr. Blankenship's campaign spending, recused himself from the Harman case.

As the litigants and court observers await the outcome, accounting principles require Massey to make an accounting for what it believes it will have to pay once the court decides. In the Wheeling-Pitt case, Massey's best estimate is that the $240 million judgment will cost it $16 million.

That strikes Wheeling-Pitt's lawyers as just another indication "that Mr. Blankenship is flaunting what he perceives to be his 'inside track' " at the Supreme Court. They made the statement in a motion filed last week asking that Justice Benjamin excuse himself from the case.

Regardless of the court's composition, one accounting expert isn't surprised that when faced with a potential judgment of $240 million, Massey has only set aside $16 million.

"It wouldn't shock me to see something that small," said Wayne Shaw, a Southern Methodist University accounting professor.

Most companies provide a range of estimates of what they would have to pay if they lose a pending lawsuit, then set aside enough to cover the most likely outcome. It may sound like a straightforward process, but it's not, Mr. Shaw cautions. He says many companies underestimate the liability because posting a larger number can be interpreted as an admission of guilt.

"You have the risk of the other side using that in court," he said. "The tendency is always to underestimate the amount."

As for reserving $16 million against a $240 million judgment, "that's really low," Mr. Shaw said. "But is there a reason for it? The question I would ask them is 'How did you come up with $16 million?' "

In its most recent quarterly report, filed with the Securities and Exchange Commission Nov. 8, Massey estimated the range of its potential liability from $16 million to $244 million. It said any number in that range is as good as any other number, so "the minimum amount in the range has been accrued."

"It is reasonably possible that our judgments regarding these matters could change," the company stated.

Massey has been wrong before. Last month, it reached a $20 million settlement with the U.S. Environmental Protection Agency that it had estimated would cost it $5 million. As a result, it had to offset fourth-quarter earnings by $15 million, the difference between what the coal company set aside and what it agreed to pay.

In the Harman case, Massey set aside $32.8 million to cover the judgment. After the Supreme Court reversed the judgment in November, Massey reflected the court victory by reversing the accrual, adding $22 million to pretax earnings and reducing its interest expense by $11.6 million when it reported its fourth-quarter results.

Should the court back Harman after rehearing the case, Massey would have to put the liability back on its books.

As for the Wheeling-Pitt case, if the outcome costs Massey more than $16 million and exceeds what insurance will pay for, "then it could potentially harm their earnings," said Steven Marascia, an analyst with Anderson & Strudwick in Richmond, Va.

No matter how a company discloses its estimates of potential liabilities, investors can make their own judgments, says Penn State accounting professor Edward Ketz. As for Massey's $16 million estimate, Mr. Ketz said: "If I were an investor, I would be perplexed.

"They have to be making the argument that they will be successful on appeal."
Len Boselovic can be reached at lboselovic@post-gazette.com or 412-263-1941.