Waste Companies: Our Books Are By The Book
The suggestion that our accounting is questionable is untrue and terribly unfair to our people and stockholders ("Burying trash in big holes--on the balance sheet," Finance, May 11).
The story states that Waste Management Inc. "bumped up earnings by 6.8%" last year by including $53.5 million in gains from subsidiary stock sales, which you state are "usually reflected on the parent's balance sheet." The SEC specifically allows such gains to be included in income, and has since the early 1980s. The rule is, once you elect to handle any such gain as income--rather than equity--you must handle all such gains as income, to be consistent. That decision was made six years ago, with the initial public offering of our Chemical Waste Management Inc. subsidiary.
Many companies handle these gains just as Waste Management did. Our accounting method is not only proper but we believe it is the most meaningful presentation in our circumstances. The combination of gains on stock transactions and gains recognized on the exchange of our Exchangeable LYONS was $53.5 million in 1991 and $52.7 million in 1990. The difference is not much of a "bump" for a company with $600 million in net income.
You question our use of "pooling of interest" accounting and suggest that this approach, too, was done at our election. Pooling is frequently used by many companies to account for acquisitions. And contrary to the magazine's suggestions, we do not do it at our election. If a transaction meets the criteria, it must be accounted for as pooling.
You further state that by using poolings, Waste Management can "book a unit's entire year's sales and earnings, even if the purchase was on the fiscal year's last day." We do not record any sales and earnings of acquired companies prior to date of acquisition. Note 2 in our 1991 annual report clearly states that "acquisitions which otherwise met pooling-of-interests criteria were not significant in the aggregate and consequently prior-period financial statements were not restated."
Citing two institutions, you say that "investors seem wary of Waste Management's moves." Institutional ownership of Waste Management actually has grown in the last year, and the number of institutions owning Waste Management is nearly double the level of 1990. Further, you state that Janus Capital Corp. has unloaded its entire Waste Management stake in recent weeks. They also purchased a large block of stock in our newly public international subsidiary, Waste Management International PLC.
James E. Koenig
Vice-President & CFO
Waste Management Inc.
Oak Brook, Ill.
Your article made a vague and misleading reference to Ogden Projects Inc.'s accounting for unbilled receivables, which reflects merely the accrual of the principal component of the debt service on our municipally sponsored waste-to-energy facilities. OPI provides waste-disposal services to client communities under long-term service agreements for periods of 20 years or longer. The typical agreement requires the client community to pay fixed service fees for the entire contract term. For facilities owned by OPI, the service fees typically include, among other things, an explicit component for debt service on project indebtedness. Under such service agreements, OPI receives the debt-service component, including principal payments, of its service fees pursuant to schedules that coincide exactly with debt-service payments due on the underlying project indebtedness. Payment of debt service by the community is a fixed obligation, not dependent upon bringing waste to the facility.
OPI follows generally accepted accounting principles (GAAP) for accrual-basis financial statements and, accordingly, service-fee revenues, including the principal component of debt service, are recognized as earned throughout the term of the agreement as services are performed, notwithstanding that certain principal payments are received intermittently over the term of the service agreement. To the extent that there is a deferment of payment by the community, the amount of revenue recognized is reduced to take into account the time value of money.
Moreover, we resent being categorized blindly as a company that is "adventurous" in its accounting practices. OPI's accounting practices are dictated by GAAP, and all information is clearly and publicly disclosed in our annual reports, which are audited by our well-respected accounting firm, Deloitte & Touche.
Scott G. Mackin
President & COO
Ogden Projects Inc.
Editor's note: Our story was correct in pointing out that the waste industry tends to use liberal accounting principles--and that some major institutional investors are concerned. But our statement that OPI's accounting practices were "even more adventurous" than those of Chambers Development Corp., which is facing an investigation by the Securities & Exchange Commission, was unwarranted.