Airing Out ”Mothballed” Facilities

A proposed accounting standard might have companies looking twice at factories and other buildings that have been temporarily shuttered.

Good, and Good for You

They also suggest that if all businesses were required to own up to those liabilities, those companies that addressed them more quickly and more completely would have an advantage in public perception, if not in the capital markets.

Companies certainly aren’t helping themselves when they defer reporting liabilities associated with mothballed facilities, says Tim Little, executive director of The Rose Foundation for Communities and the Environment, a research and advocacy organization. In his report “Fooling Investors and Fooling Themselves,” Little writes, “Over time, these mothballed sites become ‘brownfields’ whose often unquantified toxicity is a major obstacle to economically productive reuse.”

A brownfield is real property that requires environmental remediation but is still marketable, explains Joe Dufficy, brownfield program director for the EPA’s Chicago office. He reckons that between 400,000 and 600,000 brownfield sites have been identified in the United States — but he adds that it’s virtually impossible to determine how many are mothballed facilities because so little information exists in public records. Owners of these stealth sites should come clean about environmental liabilities, believes Dufficy, if only because a potential property buyer would deeply discount a property with a cost that can’t be measured.

A stronger reason for coming clean that finance executives already know very well, says Robert Lipscomb, is that just because a facility is in mothballs doesn’t eliminate all the carrying costs. Lipscomb, the brownfield program manager for architectural and engineering firm Barge Waggoner Sumner and Cannon Inc., notes that ongoing expenses include taxes, insurance, security, maintenance, and the cost of management’s time.

Total annual costs can easily top $100,000, according to Lipscomb; on a present-value basis, an average mothballed site would be carried as a $2 million liability. For a dormant asset, he reflects, that’s a significant burden on the balance sheet, especially since it’s greater than the cost of environmental liabilities for most brownfields. What’s more, this doesn’t take into account the lost opportunity of reinvesting the proceeds from the sale of a clean property. Observes Lipscomb, “Current accounting practices can obscure the value of the clean asset as well as the value of the liability.”

Another approach is to transfer the cleanup — and the risk — to another party. To a sell a riverfront site that was home to 150-year-old power plant, Consolidated Edison of New York paid the TRC Cos. a fixed fee (reportedly, $103 million) to decommission the site, removing asbestos and lead paint, demolish the plant, and return the site to a condition approved for mixed-use development. After receiving the OK this month from New York’s public-service commission, Con Ed is ready to seal a real-estate deal with East River Realty. The property will fetch between $300 million and $600 million, depending on its final use.

And What about Those Audits?

Greg Rogers believes that public-company directors and officers may also be caught off-guard by the new FAS 143 interpretation. Rogers, a practicing environmental lawyer and non-practicing CPA with Guida, Slavich and Fores, notes that many corporate accountants have defer booking environmental liabilities, based on their interpretation of the current FAS standard and existing environmental laws.

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