Tuesday, May 22, 2007

Pollution P&L

The idea that polluters are responsible for cleaning up the nasty stuff they spew out and the use of fines as the regulatory “big stick” are not new. Big business whines and complains about the high cost of pollution abatement, raising the specter of higher prices for products and services as the inevitable consequence. That is absolutely correct. Pollution abatement costs money.

Anadarko Petroleum (APC: NYSE) just settled last week with the Environmental Protection Agency over excessive pollutants from some of Kerr-McGee’s natural gas compressor stations in Colorado and Utah. Anadarko bought Kerr-McGee in August 2006. Anadarko is installing emission controls at the sites for an estimated $18 million and will pay $250,000 for environmental projects in the affected geographies. The EPA is also levying a $200,000 penalty. Although $18.5 million sounds like a lot of money, it represents 0.4% of Anadarko’s net income in 2006. The Company has just under a half billion in cash in its balance sheet.

Ten years ago Anadarko may have done a great deal of complaining about even this seemingly immaterial expense. Perhaps they might have even sent in lobbyists to Washington, pressuring officials to reign in the EPA. This time Anadarko issued a contrite statement and promised immediate compliance.

Perhaps Anadarko and other polluters are finally beginning to understand where the debits and credits of pollution really reside. The cost of pollution is on someone’s profit and loss statement, someone’s balance sheet. Until environmental regulations are enforced pollution is a personal expense for consumers in the form of poor health and increased medical costs. So when polluting businesses attempt to scare the public with higher product prices…well it just does not seem all that threatening to the people who are paying for pollution with their lives.

Perhaps corporate executives have known all along. When Kerr-McGee spun off its chemical manufacturing business to a new corporate entity, Tronox, Inc., Kerr-McGee had to agree to reimburse Tronox for environmental remediation costs up to $100 million. Subsequent to the Kerr-McGee acquisition, Anadarko is now on the hook for that $100 million. The debit and credit picture was apparently quite clear to all involved in that deal.

Trouble is, when the Kerr-McGee deal was complete, the facts and figures on pollution liabilities went below the surface. Anadarko is a large corporate entity with numerous subsidiaries and its balance sheet shows all figures in aggregate. The pledge to Tronox and the pollution control installations in Colorado and Utah are disclosed in footnotes (on page 108 in the 2006 10K, if you care to look). At the end of 2006, the company had a $59 million liability on its balance sheet relating to the Tronox commitment and another $87 million in liabilities for various remediation and reclamation obligations.

Greater transparency in financial statements for pollution liabilities (and credits) would be helpful for investors. It is important to be able to evaluate the seriousness of industrial companies like Anadarko, which devotes
five pages of its web site to a description of its environmental conscientiousness. Anadarko describes its program to sequester carbon dioxide from its Salt Creek and Monell projects in Wyoming. The company estimates it expects to sequester more than 30 million tons over the lifetime of the projects. This sounds the a fantastic figure, but leaves open the question of how much carbon dioxide will still go into the atmosphere and on which P&L the cost will end up.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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