The accident may depress sales and increase costs tied to lawsuits and worker claims, Standard & Poor's said yesterday. The ratings firm placed Massey’s BB- credit grade on watch for a downgrade, citing lost production, the “workers’ compensation liability and any impact potential lawsuits brought against the company may have.” Jeff Gillenwater, a spokesman for Massey, didn’t return calls seeking comment.
“Our operations are subject to certain events and conditions that could disrupt operations, including fires and explosions, accidental mine water discharges, coal slurry releases and impoundment failures, natural disasters, equipment failures, maintenance problems and flooding,” Massey said in its annual report last month. “We maintain insurance policies that provide limited coverage for some, but not all, of these risks.” While the firm self-insures underground equipment, “We do not currently carry business interruption insurance.”
Massey, the largest coal producer in Central Appalachia, slipped $3.23, or 6.7 percent, to $45.22 at 4 p.m. in New York Stock Exchange composite trading after falling 11 percent yesterday. The April 5 mining accident was the worst in the country since a fire killed 27 workers at the Wilberg complex in Utah in 1984, according to the U.S. Mine Rescue Association.
‘It’s Come in Handy’
Competitor Consol Energy Inc. has purchased business interruption insurance and “frankly, it’s come in handy,” said Jeremy Sussman, a coal analyst at Brean Murray Carret & Co. in New York. Consol said in its most recent annual report that it was notified by its insurers it would be paid $50 million in a final settlement related to a 2007 mine closure.
Sussman said it’s “not a cut-and-dry decision” to buy business-interruption coverage in the mining industry. “There are a lot of companies that don’t have this type of insurance, and there are companies that do,” he said.
Mine operators weigh “the cost of business-interruption insurance -- it’s not cheap by a long shot -- versus the probability of having a loss,” said Ron Parry, a senior vice president at Chicago-based Aon Corp., the world’s largest insurance broker.
‘A Limited Number’
“There are a limited number of insurers in the world that will write property insurance on U.S. coal mining companies because of the exposures involved,” Parry said. “If you add business interruption to the equation, you’ve reduced that list even further.”
Operations at coal companies are “often interrupted for various issues, whether safety, labor, or geologic,” said Mark Dwelle, an insurance analyst with RBC Capital Markets, and some insurers shun risks that they regard as recurring.
“Our top priority is the safety of our miners and the well-being of their families,” Massey said in a statement on its Web site. “We are working diligently on rescue efforts and continue to partner with all of the appropriate agencies.” In addition to those killed, four miners were reported missing.
Lost production tied to the accident could lower earnings before interest, taxes, depreciation and amortization by as much as $50 million, S&P said in its statement. The ratings firm previously estimated 2010 Ebitda of more than $600 million.
Workers’ Compensation
Massey has workers’ compensation coverage through a combination of self insurance, participation in a state-run program and commercial insurance, the company said in its filing.
Dependents of deceased employees are entitled to receive recurring payments of two-thirds of the miner’s average weekly wage under state rules, said Jason Butcher, a spokesman for the West Virginia insurance commissioner’s office. The maximum monthly benefit is about $2,940, he said.
Massey may face additional costs because the state allows injured employees or dependents of deceased victims to sue a company for damages beyond workers’ compensation benefits, said Thomas Cady, a law professor at West Virginia University.
The question for Massey is “how is it going to pay for the hundreds of lawsuits against it worth tens of millions of dollars brought by the surviving widows and dependents of all those who were killed,” he said.
Property Coverage
Massey said in its annual report that it maintains property insurance, which is expected to cover losses from an Aug. 27 fire at a plant near Logan, West Virginia. The company received $15.4 million of insurance proceeds during 2009, Massey said. Asked during an Oct. 28 conference call if insurance policies compensate for the company’s lost profits after the fire, Chief Executive Officer Donald Blankenship answered “They won’t cover business interruption.”