This article originally provided by
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
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
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
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 email@example.com or 412-263-1941.