80 Countries and Counting

From Olympic stadiums to nuclear cleanups, CH2M Hill is as ubiquitous as it is anonymous. An interview with CFO Michael Lucki.

Being in 80-some countries, you must have a pretty significant exposure to Foreign Corrupt Practices Act violations, including bribery. How do you mitigate those risks?

One of our guiding principles is that we won’t work for any local government agencies in countries where we believe there’s a high degree of corruption. Instead, we will work for large, global companies that have the same FCPA policies and procedures as we would.

We [also] have extensive employee training, especially within our international operations, and we try to avoid acquiring foreign companies that have done a lot of work on the municipal or government side, because they’ve been doing business a certain way and you can’t change them.

What about two other major risks in global business, namely the volatility of currencies and commodities?

We put currency risk onto our clients. We’ll write a contract in a local currency to cover local costs and then possibly split the contract so that part of it stays in U.S. dollars and part is in local currency. So we do some hedging [with financial instruments], but not a lot. [Editor's note: In 2010, the company gained $13.5 million on foreign-currency translation.]

From a commodity perspective, we try to get price escalators in our contracts, where if the price goes over x amount the client will pick up that increase. For example, in our power jobs we tend to have a price escalator for copper, which is a big component of a power plant. Customers usually are willing to [go along with that] because they pay more only if prices actually go up. If they want us to take on the commodity risk, our price tends to be a lot higher.

Looking at the nuclear cleanup that Japan faces, how costly might that effort be?

It could be a $10 billion–to–$20 billion cleanup, so we’re actively pursuing opportunities that may exist there. But the challenge is that Japan historically has been a pretty closed environment for [foreign] engineering and construction, so time will tell whether we’ll have an opportunity or not.

On a more positive note, you’ve benefited from a rise in the price of gold, although not in the way people might expect.

True, the price rise doesn’t affect us directly, but it does affect some of our customers, because they are now spending more money to expand their mining operations, and so we may get more environmental permitting work from that. Every day that the price goes up many more mines become much more affordable.

And what about “black gold”?

Our focus to date has been on the United Arab Emirates, Abu Dhabi, and Dubai, but we’re also looking at Saudi Arabia. Saudi Arabia plans major capital improvements — I’ve heard numbers up to $250 billion to be spent on refining and chemical infrastructure over the next 10 years. And if multinational firms go back into Iraq for oil-field development, that’s a strong area for us.

In 2000, CH became an employee-owned company. Why does that structure make sense?

CH has always had a degree of employee ownership, and in 2000 we began to pay bonuses in a mix of stock and cash [versus all cash], to allow the balance sheet to build net worth, or equity. That gave us the balance sheet to get bonding and surety [insurance, which is critical to public-works projects], and allowed us to do more design-build projects, to the point where today such projects account for about 20% of our total.

CH2M Hill has its own stock market, essentially?

Yes, every quarter for two weeks you can buy or sell your shares. You can buy one share, sell all your shares, or any combination in between. So it’s truly a very liquid market for employees. And we have a very simple formula for the stock price, based on the four prior quarters’ earnings, shareholders’ equity, [and some fixed multipliers]. Frankly, our employees probably feel more comfortable with our formula evaluation [than with publicly traded stock] because they know that some outside event, like the financial meltdown in 2007, or Fukushima [the Japanese nuclear-power-plant disaster], will not affect the share price. [Editor's note: On May 5, the price was set at $50.43 per share, a 7.9% increase from the previous quarter, and up 23% over the year.]

With 8,000-plus shareholders, you already have to do all of the Securities and Exchange Commission reporting. Why not just go public?

That’s something that we, as a management team, evaluate all the time. Right now our plans are to continue our ownership structure, but as we look at acquisitions and other things in the future that may change.

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