A consultant with Triangle Economic Research, an Arcadis company, Tim Havranek works with Fortune 500 clients to identify and quantify their potential environmental liabilities and to simulate the least costly routes to meeting their responsibilities.
Large industrial companies operating out of many different locations and facilities often have numerous actual or potential environmental legacies that linger for decades as financial liabilities. Longtime DecisionTools® user Tim Havranek has made a successful career out of helping companies manage their “environmental risk portfolios” cost-effectively. A consultant with Triangle Economic Research, an Arcadis company, Havranek works with Fortune 500 clients to identify and quantify their potential environmental liabilities and to simulate the least costly routes to meeting their responsibilities. Many of the complex cases that he and his associates at TER work on involve hundreds of millions of dollars, multiple stakeholders, and a powerful amount of modeling. As he has for years, Havranek relies on @RISK and PrecisionTree® to compare the scenarios and the decision paths that guide his clients’ decisions.
A Typically Complicated Case
In one recent case, a major industrial manufacturer sold approximately 15 of its active plants to another manufacturer. The terms of these sales included the provision that the original corporate owner would retain responsibility for historical environmental impacts. As time passed, environmental claims against the original corporate owner continued, and the corporation sought appropriate means of reducing cost and risks, such as receiving regulatory closure and/or selling the properties and liabilities to other parties.
Also, the historical environmental impacts at times potentially limited the ways that the new owners could manage and expand the properties. This often led to disagreements. Such disagreements were anticipated during the sale, and the purchase agreement included an arbitration clause to address issues as they arose.
Three Routes to Resolution
The corporation identified three possible solutions:
- Pay for the transfer of liabilities to the current owners of the plants (cash out)
- Buy back the properties
- Continue under the asset purchase agreement and the system of arbitration it provided.
Havranek used Triangle’s time-tested procedure for framing the model. He met with all the stakeholders to identify all known cost elements, inherent uncertainties, and future potential liabilities for each of the three alternatives. The model included more than 100 unknowns. In order to pinpoint those issues on which the company would need to prevail in arbitration, Havranek and his team performed sensitivity analyses on the cost drivers identified by the framing meeting participants. The model was then run using @RISK and PrecisionTree.
Triangle Economic Research
Outside Verification
The model had three output cells, one for each alternative. The outcome was intriguing: the least costly alternative was to stay with the asset purchase agreement and arbitrate as needed. The model indicated an expected value savings of more than $30 million. An outside actuarial group verified and validated the model using proprietary actuarial software. In the end, the actuarial group’s projections agreed not only with Triangle’s inputs and assumptions but also with its findings.
Simplifying the Complex
Although other companies may turn to proprietary software to parse environmental risks, Havranek sees no reason to use custom software to accommodate the many complex inputs he includes in his models. He likes the convenience of working in Excel and being able to share his results with clients. But most important, he says, “I am always trying to streamline my models. To simplify simulations you need the flexibility that proprietary tools don’t always offer. These tools have that flexibility without any sacrifice of power. @RISK and PrecisionTree have all the power you need.”