The CERCLA of life

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Like all mining and natural resource extraction companies, Teck can take a bad rap for their actual or perceived damage to the environment.  I will be a realist and admit that some damage is going to be incurred whether we are talking about the oil sands in Fort McMurray or Teck’s lead/zinc smelter in Trail, BC.  Of course I am still very concerned about the extent of the damage and companies must be doing all they can to minimize the impact on the earth and the people affected.  The smelter in Trail BC is currently owned by Teck, but some of what I’ll mention here preceded their ownership.  Historically the Trail, BC smelter has not been the cleanest enterprise in the world.  In fact the city of Trail was ranked as the second most polluted city in North America.  As early as 1925, nearby settlers sued the smelter for damages to crops and forests. The real push to clean up their act started in 1975 when a study of the lead levels in young children were well above any reasonable safe level.

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Teck has recently been in the news for some pollution that they have admitted they dumped into the Columbia river that flows past the smelter.  Trail, BC is a stones throw away from the US border and the Columbia river flows south so the pollution has ended up in the US.  I’d been reading the recent news stories and then bumped into the Teck controller the other day.  I asked him how the lawsuit was affecting their financial reporting, expecting him to say that they were accruing millions of dollars for the potential costs.  Nope.  It turns out that while everyone knows what was dumped in the river, no one is all that clear on how much damage has occurred.  Some people (mostly Teck employees) claim very little damage has occurred.  So they’re paying for a bunch of environmental studies but no accrual beyond the costs of those studies has happened.

Then the controller mentioned to me that their bigger concern is selenium.  What?  I’ve studied Teck for years and never heard of selenium, how bad could it be?  It turns out its not good news.

Ok, so Teck has some trouble with pollution of the Columbia river and then this selenium problem.  How do these impact their financial statements?  I was expecting the Columbia river lawsuit to show as an accrual which is a liability.  Check out the balance sheet (the December 2012 financial statements have not yet been released).  First, note that Teck is financially very healthy: total debt ($16 Billion) is less than 50% of the total assets ($34 Billion) and the current assets ($7.4 Billion) far exceed the current liabilities ($2.1 Billion).  Next, realize that to find out very much about the accruals we’ll need to dive into the financial statement notes, particularly note 20 for “Other liabilities and provisions”. Also, notice at the bottom of the balance sheet, that contingencies are discussed in note 22, that will be interesting to read as well.  Access the full financial statements and notes from the left hand side, “Consolidated Financial Statements (PDF)”.

Here is a portion of note 20:

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This is a complex financial reporting topic but notice that selenium is mentioned in the second paragraph.  Accounting for these types of costs requires a lot of estimation: how much the remediation may cost, when it will occur, an appropriate inflation rate, and an appropriate discount rate.  Be very clear that the number shown in the financial statements is an estimate.  I look forward to seeing how they adjust the December 2012 financial statements, I suspect the remediation costs will be dramatically higher.

Now let’s turn to note 22, the contingencies:

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The important paragraph to read is that last one, “until the studies … are completed, it is not possible to estimate the extent and cost …”  What that means is that Teck has not recorded any liability yet for the Columbia river pollution.  They simply have no idea how much they may be on the hook for, if any amount, so have not recorded anything.  This isn’t devious or wrong, its in accordance with generally accepted accounting principles (IFRS) and highlights again how estimation and judgement are a huge part of the financial reporting.

Now back to the title, “CERCLA of life” – yes its a bad pun, my apologies to Simba et al.  CERCLA is the US Comprehensive Environmental Response, Compensation and Liability Act, otherwise known as Superfund.  It does affect Teck, it has no impact on the Lion King.

 Note: this blog was originally posted on my site hosted by Pearson Education(http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)

Jumbo Ski Resort – a jumbo disaster?

In BC there was a significant announcement in the last few months that a new ski resort had received final governmental approval.  Jumbo Glacier Resort has been in the works for almost twenty years but has received plenty of bad press from environmentalists and other stakeholders that felt the resort was inappropriate for that location.  I don’t necessarily agree or disagree with those views, however I have always been shocked that someone was willing to throw $900 million into the project.  Skier visits are decreasing all across North America, a combination of demographic shifts, economic conditions, and weather patterns.  WhistlerBlackcomb’s skier visits are shown below, its hardly what you would call a “growth industry”.  Is there really consumer demand for another provider?  I suppose if Jumbo was to offer something unique then perhaps there would be a business case for it.  What does Jumbo have going for it?  Great snow, lots of terrain.  Downsides?  Location.  Its not easy to get to.  WhistlerBlackcomb claims to be within five hours drive for seven million people.  How many people live five hours way from Jumbo?  Substantially less than two million.

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There are two accounting lessons that can be learned by looking at this situation.  First, non-financial information is vital to understanding and analysing a business.  In the case of ski resorts, skier visits and convenience are obviously critical.  For grocers, you may find managers talking about inventory turnover and inventory transit time.  As a financial statement user, don’t forget the power of the non-financial information.  That information is not always easy to find but is necessary to complete the picture the financial statements begin to paint.

Second, understand the demographics of the business’ consumer.  The first time I really considered demographics was reading David Chilton’s Wealthy Barber 20 years ago.  If you haven’t ever read that and want to understand how important demographics are to businesses I highly recommend his books.  What do we know about North American demographic trends?  The population is aging as the picture below clearly indicates.  I’d hazard a guess that older people ski less than young people so I don’t see a huge turnaround in the key skier-visit statistic.  Where does that leave the new Jumbo ski resort?  Lots of terrain, great snow, an inconvenient location, and decreasing demand.  My guess is that someone, somewhere in the Jumbo organization will realize that there are easier ways to waste $900 million and the project will be dramatically changed before it gets started.  If you’re interested in skiing or the resort business and disagree, I’d love to hear your comments below.

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Note: this blog was originally posted on my site hosted by Pearson Education (http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)

We’d better give our heads a shake

Oil Sands

The Globe and Mail special on the Alberta Oils Sands is fascinating.  How we, as a species, can think that we can modify/extract/rape the earth like they are currently doing up by Fort McMurray and still remain sustainable is a question that needs to be dealt with.  Whether you believe in global warming/climate change or not, why should we be allowed to leave such a large, significant, dramatic footprint on the earth?  Sure there is lots of demand for oil, and sure, Alberta has a lot of it – basic economics aside, that doesn’t mean that we need to meet that demand.  Small children have an almost limitless demand for candy and TV.  I’m fairly sure that most parents don’t just cave-in and supply those “needs”.  So why do we have to do it with oil? Why can’t we just say – enough is enough and maybe we need to change our lifestyle to fit our environment rather than forcing change on our environment in order to meet our lifestyle?  I believe in small steps making a difference, in personal responsibility, and that it’s not too late.  So I ask you – what steps have you already made or what small steps are you willing to make?  We don’t need to learn from Ralph Klein or Ed Stelmach, I suggest that their way of thinking is: (a) greedy, (b) old fashioned, (c) corporate whore-mongering, or (d) all the above.  Comments are more than welcome!