Few hints of trouble in Massey Energy’s filings __»

April 8, 2010

It’s becoming clear that Massey Energy (MEE), which owns the Upper Big Branch mine in West Virginia where 25 miners died after an explosion this week, has had a spotty regulatory history.

By one count, the Upper Big Branch alone had 3,007 violations over the last 15 years (that’s nearly three a week) and more than 600 over the last year-plus; Bloomberg News reports that it racked up $900,000 in fines over the last year alone. One of the bigger fines it’s contesting: A recent one centering on the “ventilation systems that are supposed to prevent the buildup of methane gas and coal dust that can cause explosions.”

But how much warning did Massey’s investors have? Certainly, mining has always been risky (though it’s safer than logging, farming and fishing), and Massey includes safety-and-health regulatory risks in its boilerplate risk factors, if generically:

“The Mine Safety and Health Administration (MSHA) or other federal or state regulatory agencies may order certain of our mines to be temporarily or permanently closed, which could adversely affect our ability to meet our customers— demands.”

In an 8-K filed March 24 — just a couple weeks before the Upper Big Branch explosion — Massey disclosed an underwriting agreement with UBS Securities to offer 8.5 million shares. Deep in the agreement itself (item [z] in a list of representations and warranties) Massey asserts that

“neither the Company nor any of its subsidiaries has sustained, since the date of the latest financial statements of the Company — any material loss or interference with its business that is material to the business of the Company and its subsidiaries taken as a whole from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any court or governmental action, order or decree, otherwise than as set forth or contemplated in the Registration Statement (excluding the exhibits thereto) — “

So it could be argued that investors might have known such a disaster was possible. But it doesn’t look like Massey was very transparent about what now looks like a steady drumbeat of regulatory criticism about its operations, and the Upper Big Branch in particular. Consider this chart of violations that the New York Times Green Inc. blog reposted, with context:

By contrast, the company’s disclosures are peppered with generic statements about the risk that new safety or environmental regulation might bring:

“Numerous governmental permits and approvals are required for mining operations. — All requirements imposed by such authorities may be costly and time-consuming and may delay commencement or continuation of exploration or production operations. … Permits we need may involve requirements that may be changed or interpreted in a manner that restricts our ability to conduct our mining operations or to do so profitably. Future legislation and administrative regulations may increasingly emphasize the protection of the environment, health and safety and, as a consequence, our activities may be more closely regulated. “

But in more than 3,000 words in Massey’s 10-K about regulation, litigation and other contingencies — from well-water litigation and customer disputes to lawsuits over flooding and road-damage from coal trucks — it doesn’t once mention the steady stream of violations that have come to light from state regulators or the Mine Safety & Health Administration since Monday’s tragic accident.

The closest thing to a warning we’ve found in recent filings may be these sentences, from p. 42 of an 80-plus page merger and acquisition agreement filed March 17 — though it’s far from clear which “Companies” the following passage refers to, or what violations might be outstanding, because the relevant schedules don’t seem to have been filed publicly:

“Schedule 6.13(a) sets forth an accurate and complete listing of all outstanding and unabated violations under the Environmental and Mining Laws against the Companies or any Company, including those being contested in good faith and those for which abatement is not yet required. Except as set forth in Schedule 6.13(a) and except as would not have or reasonably be expected to have a Material Adverse Effect on the Companies, the Companies are in compliance with Environmental and Mining Laws. “

Massey does disclose that it doesn’t carry business interruption insurance — something that Bloomberg News notes has “come in handy” for competitors — and elsewhere says that if it can’t mine the coal it’s promised to customers, it may have to buy it for them.

The loss of life at Upper Big Branch is undeniable. It remains to be seen, of course, whether the tragedy at Upper Big Branch will prove financially material for Massey — the real test of how adequate Massey’s disclosures have been. Certainly, the ratings agencies are worried, and the 15% drop in Massey’s shares since Monday afternoon suggests that investors are as well.

Too bad the routine disclosures in the filings provided such little warning.

Image source: public.resource.org via Flickr

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