We spend a lot of time researching companies and their financial disclosures for environmental obligations and asset retirement obligations.
Yes, I know, some of us at ENFOS need to get a life. But this information is not only interesting to us environmental liability geeks it also provides us with insights on what is going on in this industry from year to year.
So what are some of these insights?
First and foremost, we know that what is disclosed in 10-K’s and 20-F’s is an accounting figure, not a true forecast of total future cash flows. That is because the disclosure and reporting requirements give companies some flexibility in how they interpret the accounting standards. But the researcher can make an assessment of year-to-year trends such upward or downward movement in balances, replenishments, and annual expenditures or settlements.
Using these trends, we can profile a company into one of three general conditions (Shrinkage, Flat-Line, Growth). Companies fitting the “Shrinkage” profile generally see lower end-of-period balances through time. This means their annual expenditures are greater than their replenishments. Most environmental or remediation executives would love to see their program fit this profile since their use of cash has a positive impact to the balance sheet. Flat-line companies fit a model of almost equal annual expenditures to their replenishments. What they spend each year to clean-up sites is off-set with an equal provision adjustment. These companies are in a “perpetual liability” mode. And finally, the “Growth” profile represents companies that are replenishing liability accounts at a greater rate than they can execute work. Sometimes this is due to merger and acquisition activity (taking on new liabilities) but can also be caused by disclosure policy, new discoveries, or poor quality forecasting on known liabilities.
No matter what profile your company currently fits within, there are opportunities for improvement. Many times we find that the best opportunity is related to the adoption of an enterprise system approach to improve business processes, risk management, and operational effectiveness.
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