After years of deferring liability costs from contaminated work sites, companies now must either deal with them or Take a hit on the balance sheet when accounting rules change next year
After more than a century of oil drilling and refining and mergers with other energy concerns like Getty, Texaco and Unocal, Chevron Corp. has inherited literally thousands of what are called brownfield sites–properties that could pose potential environmental liabilities because of the presence of a hazardous substance, pollutant or contaminant. Over the years Chevron has collected reams of information on the soil, groundwater and potential for contamination of nearby properties. With this data, Chevron risk managers have attempted to develop a reliable dollar figure for the cost of prospective bodily injury and property damage related to each. The work was daunting, but necessary.
While these properties were on the books, the full financial impact of potential liabilities associated with them was never felt because of accounting provisions that allowed Chevron and other companies to defer them indefinitely. All that changes in 2009 with a raft of new accounting rules–specifically FAS 143 and 141R and FIN 47–that will force companies like Chevron to account for the net present values of such properties on the balance sheet. For Chevron, this is forcing fast and difficult decisions on which impaired properties were best to divest, clean up and redevelop, or hold onto for some long-term use. "We were faced with diverse information on the properties from numerous internal databases," says Jane Anderson, surplus property manager at Chevron EMC, an environmental management unit formed within Chevron to manage its distressed, underutilized and surplus properties. "Pulling it all together for senior-level decision-making purposes was demanding."
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Finally, Chevron identified more than 500 brownfield properties it wanted to do something about–either sell, redevelop or retain. "But we still needed to sort out what to do with [each]," says Anderson. "To do that, we needed to bring together multiple elements of information from multiple databases."
Enter Fred Savage, Chevron's risk manager. During policy renewal discussions, Savage learned from his insurance broker Marsh Inc. about an innovative software program designed to assist companies in evaluating brownfield sites for disposal or retention. Marsh was working with RTI International, a not-for-profit research and development institution. RTI International had created an innovative software application called SBS Discovery that offered an effective way to evaluate scores of contaminated properties and better understand the risk-reward tradeoff. Savage passed on the information to Anderson.
Armed with detailed data on each of the 500-plus brownfields, Chevron has identified a dozen properties for redevelopment, quantifying the stranded asset value of the tracts. Even more properties–Anderson won't say how many–are targeted for divestiture. "We've been able to answer all the questions about these sites–the liabilities they imposed, what they're worth and the order in which we should proceed to do something about them," she says.
Integrated oil and gas giants like Chevron aren't the only enterprises with environmental time bombs on their books. Any company that has manufactured anything over the last century faces the likelihood that they own contaminated land. According to the National Brownfield Association, close to 50% of the more than $1 trillion in commercial properties held by U.S. corporations is impaired. The Environmental Protection Agency estimates there are as many as 500,000 brownfield sites in the country, although research by RTI International suggests that number could be far higher. The good news is that 75% of the sites can probably be "profitably redeveloped," says Glenn Osmond, senior director of Sustainable Business Solutions, the Marsh-RTI International joint venture.
In 2005 RTI International was engaged by a major U.S. manufacturer (Osmond cannot divulge the name) to assist the company in evaluating thousands of brownfield sites. "We had developed software tools that we bundled together and retooled to analyze the company's underutilized properties," Osmond says. "They wanted to get a lot of the properties off the balance sheet, but needed a cohesive strategy to determine which ones and in what order."
After successfully solving the client's dilemma, RTI International decided to commercially market the toolset. Marsh was selected as a joint venture partner because of its expertise in evaluating environmental liability to determine insurance exposure and its formidable client base. Marsh "is sitting at the table helping advise (the client) on the risks associated with each property," Osmond explains. Marsh's risk transfer module was incorporated into SBS Discovery after the venture launched in January 2007. "Ultimately, clients must make investment decisions–do they sell these properties, donate them, redevelop them or just hold onto them as is?" says Jim Vetter, a senior vice president in Marsh's environmental practice. "These are competing alternatives that may represent a source of income, depending how they're monetized. To do this, you have to assess the risks associated with each property against the upside of cash flow and returns."
SBS Discovery pulls together all the data that exists on a site to offer a unified perspective of the impaired property's potential value relative to the remediation costs. "Properties are then prioritized for divestment or reuse," Osmond says. "Companies can then decide where they want to apply resources to get the best value. Revitalization efforts, for example, can free up cash and create fresh capital for reinvestment. We help guide the process."
The new tool also offers a way for companies to address new accounting regulations. The Financial Accounting Standards Board requires companies with environmental liabilities to value these risks in dollar terms. At present, regulations like FAS 5 require a "reasonable" estimate of this liability, offering a loophole that many have used to underreport. "Companies have never fully booked the true value of these liabilities," says Greg Rogers, an attorney at the law firm of Guida Slavich & Flores and president of Advanced Environmental Dimensions, specialists in environmental accounting and tax issues. "We're moving toward fair value measurement of liabilities. You can't book `zero.' You have to book something."
Chevron is trying to get this done before the deadline. "We've figured out how much the liabilities are, how much properties are worth, which we're going to sell, which we're going to keep and which we're cleaning up for use again someday," says Anderson. "We've got a path now on how we should proceed."
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