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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 0-11688
AMERICAN ECOLOGY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-3889638
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
805 W. IDAHO, SUITE #200, BOISE, IDAHO 83702-8916
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (208) 331-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $.01 par value per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ].
At March 26, 1998, Registrant had outstanding 13,498,429 shares of its
Common Stock. The aggregate market value of the Registrant's voting stock held
by non-affiliates at this date was approximately $11,305,918 based on the
closing price of $1.875 per share as reported on the Nasdaq Stock Market, Inc.'s
National Market System. For purposes of the foregoing calculation, all directors
and officers of the Registrant have been deemed to be affiliates, but the
Registrant disclaims that any of such directors or officers is an affiliate.
Documents Incorporated by Reference
Portions of the Proxy Statement for 1998 Annual Meeting of Stockholders.
Part III
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PART I
ITEM 1. BUSINESS
American Ecology Corporation and its subsidiaries (hereinafter collectively
referred to as the "Company" unless the context indicates otherwise) provide
processing, packaging, transportation, remediation and disposal services for
generators of hazardous waste and low-level radioactive waste. Hazardous waste
consists primarily of industrial waste, including waste regulated under the
Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA" or "Superfund"), and the Toxic Substance Control Act ("TSCA").
Low-level radioactive waste ("LLRW" or "low-level waste") consists of materials
contaminated with low-levels of radioactivity and is generated by nuclear power
facilities, industry, hospitals, universities, laboratories and other research
facilities. In 1997, 39% of the Company's revenues were derived from hazardous
waste services and 61% of the Company's revenues were derived from LLRW
services.
The Company generally performs its operations through its wholly owned
subsidiaries. The Company's material subsidiaries are: US Ecology, Inc., a
California corporation ("US Ecology"), Texas Ecologists, Inc., a Texas
corporation wholly owned by US Ecology ("Texas Ecologists"); American Ecology
Recycle Center, Inc., a Delaware corporation ("AERC"), American Ecology
Environmental Services Corporation, a Texas corporation ("AEESC"), and American
Liability and Excess Insurance Company, a Vermont corporation.
The Company and its predecessors have been in business for over 40 years.
The company was originally incorporated in California in October 1983. In May
1987, the Company was reincorporated as a Delaware corporation by merger into a
newly formed wholly owned subsidiary incorporated in Delaware for that purpose.
The following table indicates the site locations where Chemical and LLRW
principal services are performed.
CHEMICAL SERVICES
FACILITY LOCATION SERVICES
- -------- -------- --------
US Ecology Beatty, Nevada Closed the First LLRW Landfill in the United States
Currently Operates a Chemical Hazardous Waste Landfill
Texas Ecologists Robstown, Texas Landfill for Hazardous and Class 1 Non Hazardous Waste
Surecycle(R) Robstown, Texas Brokerage Services for Hazardous and Non Hazardous Waste
AET Transportation Pasadena, Texas Provides Transportation Services for Hazardous and Non
Hazardous Waste
AEESC Winona, Texas Closed Facility - March 17, 1997
LLRW SERVICES
FACILITY LOCATION SERVICES
- -------- -------- --------
US Ecology Richland, Washington LLRW Hazardous Landfill
US Ecology, Mid- West Oak Ridge, Tennessee Brokerage Services for LLRW
Brokerage
AERC Oak Ridge, Tennessee Provides LLRW Processing, Packaging, Surveying, and
Large Motor Rebuilding
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CHEMICAL AND HAZARDOUS WASTE SERVICES
The Company provides a variety of hazardous waste management services to
its customers including stabilization, solid waste disposal, transportation, and
brokerage. The Company's customers are generally in the chemical, petroleum,
pharmaceutical, manufacturing, electronics and transportation industries.
The hazardous waste management services provided by the Company are
generally performed pursuant to non-exclusive service agreements that obligate
the Company to accept hazardous waste from the customer. Fees are determined by
such factors as the chemical composition and volume or weight of the wastes
involved, the type of transportation or processing equipment used and distance
to the processing or disposal facility. The Company periodically reviews and
adjusts the fees charged for its services.
The Company competes with several very large U.S. companies. The largest,
Waste Management, Inc., has agreed to an acquisition by USA Waste, and the terms
are currently being reviewed by the Department of Justice. USA Waste provides
many services including residential, commercial, and roll-off industrial waste
collection and disposal. They consume the majority of the waste and hazardous
waste market in the United States with other competitors like Browning-Ferris
Industries, Inc. There are about five or six major waste and hazardous waste
companies which consume the greater majority of the market. American Ecology
Corporation is very small in relation to the competition and does not yet
provide residential waste services.
Hazardous Waste Disposal has undergone some very significant changes since
the implementation of the Resource Conservation and Recovery Act of 1976, as
amended ("RCRA"). New regulations have been promulgated that have imposed land
disposal restrictions forcing generators to minimize waste and encourage reuse
and recycling. As a consequence of this, national hazardous waste generation
rates have continued to decline both in the number of generators and the volume
of waste generated.
On a national level for the period 1994 through 1997, hazardous waste
generation is down approximately 30 percent, while the number of generators is
down 11 percent. The number of treatment, storage, and disposal companies has
declined a remarkable 49 percent marking a significant exit from and
consolidation in the market, and that trend seems to be continuing.
As a consequence of reduced volumes, competition, surplus disposal
capacity, and innovative technologies, both gross revenues and disposal price
yield have eroded significantly. On a consolidated basis for the Company's
Chemical Division, gross revenues have declined 66 percent from $49,908,000 to
$16,820,000 for the period 1994 to 1997. Nationally, disposal prices have
declined about 66 percent per ton for the same period. The Company's Beatty
disposal price has declined approximately 64 percent, and TECO disposal price
has declined approximately 38 percent.
In order to meet the challenges of the changing industry, the Company has
adjusted site operations to better manage direct costs and S,G&A.
These declines in waste volumes may be attributed to a number of factors,
key ones being noted below:
Site Locations - Transportation Costs. The locations of TECO and Beatty
present additional transportation costs and downward pressure on disposal
pricing. Depending on our customer's location, the transportation cost may
exceed the disposal cost on a unit basis. In order to retain market share and
secure business, the high transportation cost is subsidized by lowering the
disposal cost. Due to the high fixed costs relating to the disposal cell coupled
with the operating costs to manage the waste, the total transportation and
disposal cost has to be in concert with our competitors' pricing strategies.
The Beatty facility relies totally on vendor trucking and is unable to
compete with competition which has vertically integrated transportation and
disposal operations. Slow payment of vendor invoices due to limited cash
resources also limits the ability of the site to secure good transportation
pricing.
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Reclassification of Waste Streams. The hazardous waste disposal regulations
are constantly changing and as a consequence more authority is being vested with
the generator to correctly classify the waste stream. Additionally, large
generators have been able to influence the federal regulations and had their
wastes reclassified from hazardous waste to non-hazardous waste. The Company has
experienced this with large quantity generators and this has resulted in reduced
volumes and reduced revenues.
Waste Minimization. The waste generators have been actively pursuing
technologies and processes that produce minimal waste, and if there is waste, to
recycle it within the system. Due to this aggressive posture by the industry,
waste minimization is also impacting the quantity of waste that is available for
disposal, nationwide.
Loss of Customers. As a result of the decline in the financial performance
of the Company, coupled with the adverse publicity associated with the Winona
facility, some customers have elected not to use the Company's facilities. This
problem is more prevalent in Texas than in California.
State Fees and Regulations. State fees and taxes are a very important cost
to a customer when he is looking at multiple options for disposal. If exorbitant
state fees are prevailing such as they were in Nevada, the Company cannot be
competitive and consequently will lose business to competitors. While the Nevada
Environmental Commission recently approved, in the fourth quarter of 1997, an
average 43 percent overall reduction in state fees, it is too soon to predict
the effect it will have on business volume. Fortunately, the fees in Texas are
very similar to the fees in Louisiana and Oklahoma, therefore, they are not much
of a factor.
Company Market Share. Market share for the two company operated commercial
hazardous waste landfill disposal sites in the United States is varied in nature
on the basis of approved permits. For the Beatty facility the market share is
California for the hazardous and non-hazardous waste and national for PCB
related waste. Approximately 70 to 80 percent of the waste received at Beatty is
generated in California. The TECO hazardous and non-hazardous waste market is
generally in-state and mostly local to the Corpus Christi area. TECO receives
approximately 10 percent of the non-hazardous waste generated in Texas and about
4 percent of the hazardous waste generated in the state. The balance of the
non-hazardous waste is disposed at competitor operations or Municipal Solid
Waste landfills that have received special permission.
The bulk of the hazardous waste generated in the United States is waste
water liquids (greater than 95 percent of the total) and the landfill component
approaches only 1 percent of the total.
Hazardous and non-hazardous waste market trends are continually driven by
new regulations, changes in regulations, available disposal capacity, recycling
and reuse technology development, and disposal pricing. It is abundantly clear
that the volume of hazardous waste generated annually is declining, and the
available market is shrinking. This volume decline is resulting from a concerted
effort by the industry to minimize waste generation in general, and to encourage
the reuse of waste as by-product for other processes. Additionally, various
industry sectors have influenced a revision of regulations and consequently have
been able to reclassify waste streams.
Historically, one of the key hazardous waste generating sectors has been
the large remediation projects. A recent study published by the General
Accounting Office indicates that the trend to exhume and clean up sites is
generally on the decline if not completely over. The key test for remediation at
sites is now headed in the direction of risk based assessment standards and that
will eventually qualify a significant number of sites to remain in situ. This
transition in thinking has brought about a near collapse of the environmental
remediation business on a national level, and concurrently a decline in the
available waste volume for landfill disposal.
On a national level there is a surplus of disposal capacity. Sites that
traditionally were seeing business on a national level have experienced
significant declines. Geographic influences have affected regional areas in
nature, and now national exposure generates only limited business with the
exception of TSCA-PCB related waste for the two Company facilities.
Regulatory changes are also playing a key role as they relate to land
disposal restrictions. Virtually all of the organic waste streams are precluded
from land disposal and that has had a significant impact on the market. The
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wastes are now directed to incineration, fuel blending, solvent recovery, or
recycling operations. Concurrently, allowing industry to reclassify waste
streams is also contributing to a reduction in available waste volume. There is
a strong likelihood that due to the reclassification activity the volume of
non-hazardous waste is going to continue to increase over the next five years.
Surplus disposal capacity will continue to drive disposal pricing downward
and force the regional concept noted above. Due to high base costs to develop
the disposal capacity and the associated infrastructure, sites with lower front
end costs are likely to see an increase in business due to pricing.
National Trends. Hazardous waste generation trends have been on a decline
since 1991. Information compiled by the USEPA and published biennially as the
Hazardous Waste Report summarizes the following data on a national level.
YEAR NO. OF GENERATORS VOLUMES IN TONS % VOLUME CHANGE
1991 23,426 306,000,000 --
1993 24,362 258,000,000 16% down
1995 20,873 214,000,000 17% down
For the period 1991 to 1995, hazardous waste generation has declined
approximately 30 percent nationally. For the same period 1991 to 1995, the
number of generators producing hazardous waste declined approximately 11
percent. This would suggest that the concerted effort of the industry to reduce
waste is certainly having an impact on the volume generated nationally.
Meanwhile, all of these market and industry changes have negatively impacted the
Company's Chemical Division.
STABILIZATION AND DISPOSAL SERVICES
The Beatty and Robstown facilities may dispose of only solid wastes, but
both facilities also have the ability to treat and stabilize waste prior to
disposal and operate transfer and staging facilities for delivery of
containerized waste for off-site disposals. Stabilization involves the mixing of
sludges and certain wet wastes with cement, lime or other solidifying and
stabilizing agents to prevent leaching under any conditions. These facilities
are sited, designed, constructed, operated and monitored to provide long-term
containment of the waste in accordance with regulatory requirements. The Company
also maintains two closed landfills in Sheffield, Illinois. See "Closed
Facilities" for more detailed information about these facilities. The following
sections describe the Company's active hazardous waste disposal facilities.
Beatty, Nevada Facility. The Company's Beatty, Nevada chemical and
hazardous waste landfill site is located on 80 acres of land 11 miles southeast
of Beatty, Nevada in the Amargosa Desert, approximately 100 miles northwest of
Las Vegas and 8 miles northeast of Death Valley and the California border. The
Company leases the site from the State of Nevada pursuant to a 1977 lease which
provided for an initial 20-year term, with a 10-year option for renewal. The
hazardous waste site was opened in 1970 and operates under authority from the
Nevada Department of Conservation and Natural Resources and the Environmental
Protection Agency's ("EPA") Region IX. It is also subject to regulations of the
U.S. Department of Transportation ("DOT") relating to methods of handling,
packaging and transporting chemical waste. The Company recently renewed the
lease for 10 years. The waste site is operated under license from the State of
Nevada. The State of Nevada charges waste fees which are deposited in state
maintained trust funds for closure, perpetual care and maintenance. The Company
does not control these two state funds, but the Company understands from State
of Nevada correspondence that these funds contained approximately $2.4 million
and $12 million, respectively, as of December 31, 1997.
The Beatty, Nevada facility had previously operated a low-level radioactive
waste (LLRW) landfill from 1962. Closure of the former low level radioactive
waste disposal site allowed the Company to transfer custody of the occupied
portion to the State while transferring the unused portion of the site to the
hazardous waste facility, thereby extending the life of the facility. The
Company received a letter dated December 30, 1997 from the Nevada State Health
Division accepting the transfer of American Ecology's radioactive waste disposal
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license for the Beatty facility. Return of the land of a disposal site is the
final part of the closely regulated life cycle of such a facility. It is
returned to the government licensing agency to ensure long-term land use
control. The event marks the first time a commercial low-level waste disposal
company in the United States has successfully completed all the work required to
close such a facility and return it to the nuclear licensing agency for
long-term care and control.
The Chemical waste facility has approximately, 164,000 cubic yards of
remaining permitted in place capacity available in the cell it is currently
operating. In addition, the facility is permitted for construction of an
additional cell with a capacity of 2.1 million cubic yards when that becomes
necessary. Most of the facility's chemical waste comes from California. Since
1996, the facility has been operating at a competitive disadvantage in the
California market because the State of California reduced the fees it charges
for chemical waste disposal in the State. However, in January of this year, the
Nevada Environmental Commission agreed to reduce the fees it charges to dispose
of chemical wastes in Nevada, an average of forty one percent. Although most
Nevada fees are still somewhat higher than California's, the Company believes
Nevada's action should help the Company regain some of the California market.
In 1997, 1996, and 1995, 58,000, 71,000, and 131,000 cubic yards of
waste, respectively, were disposed of at the facility. Disposal operations at
the Beatty site involve stabilization of certain wastes to meet land disposal
criteria, and the burial of chemical waste in secure landfill cells which are
engineered, constructed, operated and monitored so as to provide for the
long-term containment of the waste. On April 4, 1997 US Ecology received its
Part B renewal permit which is effective until 2002.
The Beatty site is one of seven landfill sites in the United States which
are authorized by the EPA under TSCA to receive and dispose of certain types of
solid polychlorinated biphenyls ("PCBs"). This authority was issued jointly to
the Company and the State of Nevada by EPA Region IX. The disposal of PCBs
accounted for approximately, 30% and 31% of the Beatty site's total volumes in
1997 and 1996, respectively. In 1995, the Company was issued a five-year renewal
permit which allows the Company to continue to dispose of non-liquid PCBs at the
Beatty site. In 1990, the Company received written confirmation from the EPA
that the Beatty site was currently authorized to accept CERCLA clean-up waste
for disposal.
Robstown, Texas Facility. The Company owns 400 acres of land near Robstown,
Texas, located 15 miles west of Corpus Christi, and operates a hazardous waste
disposal site on 240 acres of the land. The site is operated under the
regulations of, and a permit issued by, the Texas Natural Resource Conservation
Commission ("TNRCC"). In addition to TNRCC regulation, the site is subject to
EPA and DOT regulation. In 1988, the Robstown site received its RCRA Part B
permit. A proposed permit renewal is expected to go to public hearing by
September 1998. Disposal operations at the Robstown site involve the burial of
hazardous waste in secure landfill cells which are engineered, constructed,
operated, and monitored so as to provide for the long-term containment of the
waste.
Groundwater at the Robstown site is monitored through the use of an
extensive well system. In 1978, an analysis of the non-potable aquifer
underlying the site showed the presence of chemical contamination. The Company
has no evidence that the contaminants have migrated beyond the permitted site
boundaries and continues to address corrective action plans in connection with
the permitting process. The Company is currently operating a non-commercial
deep-injection well at the facility for the disposal of contaminated groundwater
and leachate in order to comply with its groundwater cleanup program.
The facility serves a wide range of industries including refining,
petrochemical, agricultural and manufacturing. In operation since 1972, the
facility has disposed of more than 900,000 cubic yards of hazardous waste and
there are approximately 28,000 cubic yards of remaining capacity. In 1997, 1996,
and 1995, 11,000, 41,000, and 47,000 cubic yards of waste, respectively, were
disposed of at the facility.
Winona, Texas Facility. The Winona facility, now a closed facility, was a
620 acre fuels blending and solvent recycling facility with two hazardous waste
deepwells and waste brokerage services. In August of 1996, the Company made a
decision to suspend further receipts of waste at the Winona facility. This
decision was made based on the adverse impact on the business base of the Winona
facility caused by inaccurate public statements and other actions of persons
opposed to the Facility. The litigation strategy being pursued by persons
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opposed to the facility includes numerous and duplicative lawsuits filed in
several jurisdictions. The Company believes that the number of lawsuits as well
as the discovery and motion practices used in each is designed to overwhelm the
financial resources of AEESC, an American Ecology wholly owned subsidiary.
On December 31, 1994 the Company purchased this facility from Gibraltar
Chemical. Since the acquisition, the Company has been faced with both legal
confrontations and operational difficulties. The operation costs have been high
and very difficult to control. As a result of the operation costs exceeding
revenues every month, the Winona site was never profitable. Management made many
efforts to preserve the site as a possible profitable operation, using different
business techniques, none succeeded. As a result of these efforts it was
determined that the site be closed under Federal and State regulations. The date
of the closure was set at March 17, 1997 when management agreed to a plan for
closing the site under RCRA rules. As part of its business closure activities,
company officials met with State regulators and negotiated an Agreed Order, with
a mutually acceptable schedule for environmental closure of the facility to
fully satisfy substantive environmental requirements. The Agreed Order requested
financial assurance be provided in the amount of $1,318,478 for the
environmentally correct closure under environmental laws. The Company has
complied with the financial assurance requirement, and currently has closure
activities underway.
TRANSPORTATION SERVICES
General. As a complement to its disposal operations, the Company also
offers hazardous waste transportation services to its customers. American
Ecology Transportation (AET) manages its operations from Robstown, Texas. AET
has transportation hubs located in Pasadena and Robstown, Texas. The primary
objective of AET is to provide value and transportation services to Texas
Ecologists and Surecycle(R) Customers. The Company's waste transportation
operations focus on the Gulf Coast market. The Company transports both hazardous
and non-hazardous solid and liquid wastes generally by truck or trailer from a
waste site to a disposal or treatment facility, such as a landfill or
incinerator. Hazardous waste is transported by the Company primarily in
specially-constructed vehicles designed to comply with applicable regulations
and specifications of the DOT. The Company's hazardous waste fleet includes 34
trucks or tractors, 289 roll-off containers and 65 trailers. Liquid waste is
frequently transported in bulk, but also may be transported in drums and totes.
Heavier sludges and bulk solids are transported in sealed roll-off boxes or bulk
trailers.
The Company also operates a scheduled, containerized hazardous waste
collection service in the Gulf Coast market called Surecycle(R), a division of
American Ecology Environmental Services Corporation (AEESC). Surecycle provides
small quantity generators with comprehensive waste management services that
includes waste analysis, technical advice, labeling, manifesting, collecting,
transporting, treating and disposing of hazardous and non-hazardous wastes. An
important feature of the Surecycle(R) program is the use of intermediate bulk
containers as a replacement for drums in many applications. Surecycle also
offers specialized 350 gallon waste packages or "totes". These totes allow waste
generators to accumulate up to six drums worth of material in the same floor
space required to store four drums. The totes are reusable, therefore the
customer also enjoys substantial savings in avoided drum purchase costs.
LOW-LEVEL RADIOACTIVE WASTE SERVICES
Low-level radioactive waste consists primarily of solid materials
containing radioactive contamination, generally decaying to safe levels within
several decades to approximately 500 years. The Company's LLRW business includes
the packaging, transportation, disposal, treatment, recycling and processing of
low-level waste. Low-level waste is generated by nuclear power facilities,
industry, hospitals, universities, laboratories and other research facilities.
This waste consists generally of material such as contaminated equipment,
discarded glassware, tools, gloves and protective clothing,
radio-pharmaceuticals and other hospital wastes, and laboratory waste materials.
This waste generally requires minimal shielding for the protection of the public
or employees from radiation. It is packaged in metal containers designed to
protect the public during transportation and provide additional long-term
containment of the waste once it is placed in the permanent disposal facility.
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The LLRW services market is generally composed of three segments; (i)
disposal, including both commercial and government markets, (ii) commercial
processing and volume reduction, and (iii) government services. The Company
operates in all three of these segments. The Company's LLRW disposal activities
involve the operation of a landfill site on government owned land near Richland,
Washington. The Recycle Center has LLRW commercial processing and volume
reduction services that include both fixed base processing facilities and
service capabilities as well as on site service capabilities managed as an
extension of the organization located at Oak Ridge, Tennessee. The government
services segment activities includes processing, volume reduction and disposal,
at US Department of Energy ("DOE") and US Department of Defense ("DOD")
locations. The Recycle Center is a well established commercial service provider
and intends to pursue these DOE and DOD markets.
THE COMPACT SYSTEM
The Low-Level Radioactive Waste Policy Act of 1980 and the Low-Level
Radioactive Policy Amendments of 1985 (collectively, the "Low-Level Act")
established the general framework for the management of commercial LLRW disposal
facilities. The Low-Level Act created incentives for states to form formal
regional alliances ("compacts") as ratified by the U.S. Congress, to
cooperatively provide for disposal of LLRW generated within their member states.
Typically one state in each compact is required to serve as the nost state for a
permitted disposal facility. Continuous disposal capacity is maintained through
the rotation of host state responsibilities among each compact's member states.
The Low-Level law provided that any compact approved by Congress could
prohibit disposal of wastes at its facility from states outside the compact
effective January 1, 1993. In anticipation of that happening, many customers
disposed of as much waste as possible in 1992 and the Company saw a marked
increase in waste disposal at its Richland facility that year. On January 1,
1993, the Northwest Compact which oversees the Richland facility restricted
waste disposal to its eight member states and to three states in the Rocky
Mountain Compact through an inter-compact contract. Consequently, waste disposal
volumes at Richland decreased significantly in 1993 and have remained fairly
constant ever since.
DISPOSAL SERVICES
The Company currently operates a licensed regional LLRW disposal facility
in Richland, Washington and is in the process of developing two additional
regional facilities for the Southwest and Midwest state's compacts. The Company
also maintains a closed LLRW landfill in Sheffield, Illinois. The following
section summarizes the Company's active and proposed LLRW disposal operations.
Richland, Washington Facility. The Company operates the Richland facility
as the only licensed LLRW disposal facility within the regional compact system.
The facility is located on 100 acres of the Department of Energy's Hanford
Reservation ("Hanford") approximately 35 miles north of Richland, Washington.
The State of Washington leases the land from the federal government and the
Company subleases the land from the State. The lease between the State and the
Federal government terminates in 2061. The Company's sublease with the State is
to be re-negotiated in 2005. Under the terms of the sublease the facility is to
be used for LLRW burial and related activities.
The facility commenced operations in 1965 and served as a national disposal
site for commercial LLRW through 1992. Under the provisions of the Low-Level
Waste Policy Act of 1980 and as amended in 1985, the State of Washington has
accepted responsibility for disposal of waste generated in the eight Northwest
Compact states and has entered into a contract agreement to provide disposal for
the three Rocky Mountain Compact states. Since 1992 the facility has been
limited to receiving LLRW from these eleven states and is barred from accepting
waste from any other state or compact region. LLRW disposal volume generated by
the Northwest and Rocky Mountain Compacts during the next four years is
estimated to be approximately 80,000 cubic feet annually. If the Low-Level
Policy Act is repealed or the State of Washington authorizes acceptance of waste
from other states or compacts, annual volume at the Richland facility could
substantially increase.
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Approximately 140 regional LLRW generators hold site use permits for access
to the Richland facility. Twelve of these generators cumulatively ship over 90
percent of waste disposed of annually. The majority of waste is received from
generators in Washington and Oregon. Two public utilities - one operating a
nuclear generating plant and one decommissioning a nuclear plant - within the
region, currently ship waste to the facility. These two utilities generated
29,000 cubic feet or over 30 percent of the LLRW waste disposed in 1997. After
2001 and termination of the decommissioning project, the remaining utility is
projected to annually ship less than 5,000 cubic feet of waste. The Richland
facility also received approximately 30 percent and 15 percent of its capacity
of over 91,000 cubic foot volume for 1997 from private industries and government
generators, respectively. The remaining volume was evenly split between
hospital/medical waste and university/research waste generators. The loss of any
large regional generator or a major increase in disposal charges could
significantly impact future operations at the Richland facility.
Disposal operations at the Richland facility are conducted under a
Radioactive Materials license issued by the Washington State Department of
Health. The license allows the Company to dispose of LLRW and special nuclear
materials. The Company submitted an application for renewal of its existing
license in January 1997. The license remains under timely renewal and when
reissued the license will be valid for a five year period.
The Washington Utilities and Transportation Commission (WUTC) has regulated
the disposal rates charges at the Richland facility since 1993. The disposal
rates are set by the WUTC at an amount sufficient to cover the costs of
operations and provide the Company with a reasonable profit margin. The Company
filed a rate case in 1995 with the WUTC to implement a rate design and revenue
requirement for the years 1996 through 2001. The WUTC approved a $5.6 million
annual revenue requirement and a rate design to collect this revenue through
site availability, volume, container, shipment and dose charges. The approved
revenue requirement is exclusive of taxes and fees. The State of Washington
charges fees for burial, site surveillance, local economic development, rate
regulation and site use from generators using the Richland facility. Revenues
are also collected from generators to fund a dedicated trust account for long
term care and maintenance of the Richland site after it closes. As of December
31, 1997 approximately $26 million was retained in this account. Another
dedicated trust account administered by the State Treasurer for use by the
Company or the state to close the Richland site retains over $25.8 million.
Competition. The Company operates the only commercial low-level waste
disposal site operating within the regional compact system in the United States.
The Company's Richland, Washington facility operates as the exclusive LLRW
disposal site for the Northwest and Rocky Mountain Compacts. The other United
States LLRW disposal facility near Barnwell, South Carolina is operated by
Chem-Nuclear, a subsidiary of WMX Technologies, Inc., and is no longer a part of
the Southwest Compact. WMX was recently acquired by USA Waste.
The Richland facility is also permitted to accept naturally occurring and
accelerator produced radioactive materials (NARM) waste and Exempt Quantity
waste from throughout the nation. During 1997, approximately 10,000 cubic feet
of NARM waste and 1,000 cubic feet of Exempt Quantity waste supplemented
revenues collected from the disposal of over 91,000 cubic feet of low-level
radioactive waste generated by Northwest and Rocky Mountain Compact states.
Under a settlement agreement signed in 1996, an annual cap of 100,000 cubic feet
was established on the NARM waste disposal. Although NARM and Exempt Quantity
waste disposal rates are not regulated by the WUTC, a portion of NARM revenue
can be applied to reduce the Company's annual LLRW revenue requirement.
In September, 1997 the State of Washington made a Determination of
Significance finding under the State Environmental Policy Act (SEPA) concerning
the Company's July 1996 submission of a Site Stabilization and Closure Plan, the
Company's February, 1997 radioactive materials license renewal application and
the promulgation of regulations by the Washington Department of Health to
establish a NARM volume cap. As a result of this finding, the State is drafting
an Environmental Impact Statement for the Richland facility. A final EIS is
expected to be issued by the end of 1998.
On November 13, 1997 the Washington Department of Ecology (WDOE) accepted a
Work Plan drafted by the Company for a comprehensive investigation of the
Richland site to assess the presence of hazardous waste constituents in the
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vadose zone beneath trenches and to confirm the performance of the disposal
trenches within the facility with respect to the protection of the groundwater
from small amounts of hazardous material associated with some LLRW. WDOE
contracted with the Company to conduct this investigation during 1998. Funding
of $786,986 from the dedicated Site Closure Account is provided for the
investigation.
Proposed Ward Valley, California Facility. California law and a
congressionally-ratified interstate compact among California, Arizona, South and
North Dakota (the "Southwestern Compact") require California to develop a
low-level radioactive waste ("LLRW") disposal facility in the State. The
Department of Health Services ("DHS" or "Department") was responsible for
identifying a private contractor for this task, and also is the agency
responsible for licensing the facility. DHS selected US Ecology as the "license
designee" for this project in December 1985. US Ecology is obligated to locate,
license and develop the project utilizing its own funds. Once established, the
Company will operate the facility and receive a return on its investment through
future disposal rates.
US Ecology identified 1,000 acres of federal land (the "Site") as the
preferred location for the project in 1988, and submitted a license application
for the facility in 1989. In April 1991, DHS and the federal Bureau of Land
Management ("BLM") published a Final Environmental Impact Report/Statement on
the proposed project and transfer of the Site to the State. In July 1991, DHS
conducted hearings on its proposed license for the facility. In December 1991,
DHS informed the Company that it had received all information necessary to
complete the requisite environmental and licensing analyses, and on September
16, 1993, the Department certified its Final Environmental Impact Report, issued
its Record of Decision on the project, issued a license to US Ecology to
construct and operate the facility (which can begin only after the Site is
transferred to the State) and executed a lease of the Site with US Ecology
(which also becomes effective once the land is conveyed to the State). In
October 1993, two lawsuits were filed in Los Angeles Superior Court challenging
the Department's decision on the project.
In October 1995, the California Court of Appeals upheld the Superior
Court's decision in favor of US Ecology and the Department on all issues.
Project opponents asked the California Supreme Court for review, but on January
18, 1996, the Supreme Court denied the petition. Accordingly, the license
decision and Environmental Impact Report have been completely and finally
upheld.
Concurrent with the licensing process and because under relevant state laws
and federal land management policies, the Site must be transferred to the State
before facility construction and disposal operations can commence, the
California State Lands Commission filed an application with the BLM in 1987 to
acquire the Site under the State's indemnity school land selection rights.
BLM analyzed the environmental consequences of the proposed conveyance
under the National Environmental Policy Act, and together with the Department
published a joint Final Environmental Impact Report/Statement ("EIR/S") in April
1991. The Final EIR/S concluded that the conveyance would have no significant
adverse environmental impact. The United States Fish and Wildlife Service also
analyzed the project's potential impact on the desert tortoise, a species which
is present at the Site and which is listed as a threatened species under the
federal Endangered Species Act. The Service concluded in a November 1990
Biologic Opinion that the project would not jeopardize the continued existence
of the desert tortoise, but recommended mitigation measures which the Department
incorporated into the facility's license.
In July 1991, the State Lands Commission decided to withdraw its indemnity
selection for the Site, apparently for political reasons. (Two of the three
State Lands Commissioners were engaged in a democratic primary election for the
U.S. Senate.) In July 1992, the Department applied to BLM for the Site's
purchase. In August 1992, BLM formally rejected the State Lands Commission's
prior indemnity selection application and published in the Federal Register a
proposal to withdraw the Site from the operation of most federal land laws to
preserve it for acquisition by the State. In September 1992, the State Lands
Commission submitted and revised indemnity selection application for the Site,
and BLM published a Notice of Realty Action for the proposed sale.
Although the proposed change of land acquisition methodologies would have
no environmental consequence, BLM decided for policy reasons to supplement the
Final EIR/S to describe this proposed change. In January 1993, however, then
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Secretary of Interior Manuel Lujan decided to sell the Site to the State before
the January 20, 1993 change of federal administrations. To accomplish this
result, Secretary Lujan foreshortened the EIR/S Supplementation process and
issued a Record of Decision for the sale, which also denied the State Lands
Commission's indemnity selection application. In other contemporaneous
decisions, Secretary Lujan denied various mining claims which had been filed
against the Site and other requests by project opponents to classify the Site as
unsuitable for waste disposal.
Transfer of the land was enjoined by a federal judge on January 8, 1993.
After the change of federal administrations, the new Secretary of Interior,
Bruce Babbitt, rescinded the prior Record of Decision and completed the Final
EIR/S Supplementation process. A final Supplemental EIR/S was issued in
September 1993, which again concluded that the project would have no significant
adverse environmental impact.
Howard Wilshire and two other U.S. Geological survey employees gratuitously
published a report questioning DHS conclusions regarding the project and
suggesting that the facility could contaminate the Colorado River 20 miles away
from the project. In December 1993, Secretary Babbitt asked the National Academy
of Sciences ("NAS") to conduct an independent review of the report's claims.
In 1995, the NAS concluded that the report did not raise any significant
concerns, but recommended that further site-specific data be gathered during
site construction, that several additional monitoring wells be constructed, and
that minor amendments be made to the project's desert tortoise relocation plans.
Subsequent to the NAS report, Secretary Babbitt concluded that further
hearings on the land transfer were unnecessary, the Department of Interior and
the State began to negotiate terms of the land transfer, but reached an impasse
on the issue of Interior's proposed continuing oversight of the project. In late
1995, the United States Congress passed a Budget Reconciliation Act, one rider
of which directed that the Site be transferred to the State by act of Congress.
President Clinton vetoed the bill. On February 15, 1996, the Deputy Secretary of
the Interior issued a press release stating that a further Supplement to the
EIR/S, "expected to be completed within one year," would be undertaken prior to
any land transfer. According the Interior, the purpose of the new Supplemental
EIR/S is to further examine the recommendations of the 1995 NAS panel, as well
as to consider the effect of the land transfer on nearby sacred Indian sites.
BLM conducted a scoping process on the proposed new supplemental EIS. After
that process was completed, DHS reviewed all of the comments and information
that had been submitted to BLM. In a November 18, 1996 letter to BLM, DHS
provided a detailed analysis of those submissions and concluded that no
significant new information or issues had been raised which warranted a further
supplement to the EIS. Accordingly, DHS urged Interior not to conduct the
proposed supplementation or any further on-site testing and instead deliver
title to the Ward Valley site immediately. Interior apparently rejected DHS'
analysis, and in December 1996 issued a request for proposals to perform the
Supplemental EIS and Interior is attempting to engage other contractors to
perform the additional on-site soils testing which the NAS majority had
recommended not be conducted until after the land transfer.
As a result of the continued inaction by the Department of Interior, the
California Department of Health Services brought suit against the Interior in
early 1997 seeking a writ of mandamus from the federal court ordering the
Secretary of Interior to convey the land to California. US Ecology has joined
this lawsuit and also filed a separate action for breach of contract against the
Department of Interior seeking damages in excess of $73.1 million. For a further
discussion of the two pending cases, please see Item 3, Other Material
Litigation.
Additional legal challenges and political delays could postpone the opening
of the facility for several years or more. The Company expects to incur costs of
approximately $120,000 per month, excluding interest, until construction begins.
These costs are not currently reimbursable from the Southwestern Compact or any
other party and are being capitalized as project costs. Assuming the land is
transferred and all challenges and appeals to the land transfer and the facility
license decision are favorably resolved, the Company expects that the
construction and start-up of the facility will take approximately eight to
twelve months. It is not possible to assess the ultimate length of the delay at
this time, nor can there by any assurance that the land will be transferred.
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If the Ward Valley site cannot be transferred, the Company has the right to
license, develop and operate an alternative site and to recover its costs for
both the Ward Valley site and the alternative site from the fees charged for
disposal at the alternative site. Under current federal and state law, the State
of California is required to provide a site somewhere and the Company has the
contractual right to license, develop and operate such site. Thus, the Company
should be able to recoup its costs plus interest thereon as provided in its
contract absent a change in federal or state law. Nevertheless, there can be no
assurance that the Company will ultimately recover its costs and interest
thereon. If the Company is unable to recover its costs, the Company will suffer
a loss that would have a material adverse effect on its financial condition.
Proposed Butte, Nebraska Facility. In June 1987, the Company was designated
to develop and operate a LLRW disposal facility ("Butte") by the Central
Interstate Low-Level Radioactive Waste Commission ("CIC"). In July of 1990, the
Company submitted an application to the Nebraska Departments of Environmental
Quality and Health ("NDEQ" and "NDOH") for the necessary license. The
application has been under review and the anticipated project completion date
has been postponed several times. In October 1997, the Departments issued their
draft evaluations of the application in the form of a Draft Safety Evaluation
Report (DSER) and a Draft Environmental Impact Analysis (DEIA) for a 90 day
public comment period. A public hearing on the documents was held during first
week of February 1998.
The DSER deemed the critical areas of site suitability, design,
construction, and performance to be acceptable. Some unacceptable areas were
identified, primarily in the areas of facility operations. The Company has fully
addressed these areas in the comments submitted to the state. The Departments
will review the public comments and are expected to issue a Final Safety
Evaluation Report and Environmental Impact Analysis with either a draft license
or a draft Intent-to-Deny a license. This is projected to occur during the
fourth quarter of 1998. Another public comment and hearing process will ensue. A
final licensing decision is projected in late 1999.
In August of 1996, the CIC voted to require the Department to issue the
DSER and DEIA in January 1997. The State of Nebraska filed a lawsuit against the
CIC in November 1996, challenging its authority to enforce a schedule. That suit
is progressing but has not yet been tried.
Project costs through 1997 totaled $87.8 million, substantially all of
which has been provided by the major low-level radioactive waste generators in
the CIC states (Nebraska, Kansas, Oklahoma, Arkansas, and Louisiana). The
Company expects to incur expenses of approximately $600,000 per month for the
remainder of the pre-licensing phase. All these expenses are reimbursed monthly
by the CIC. Once the two year construction period commences, expenditures are
expected to be approximately $50 million, excluding interest. Under the present
contract with CIC, this construction expense will be the Company's
responsibility. Because of delays in the completion of the license review,
pre-licensing funds that had been committed to the project were exhausted. The
Company is working with the CIC to renegotiate contract amendments to provide
further funding, through at least 1998.
In August 1994, the U.S. Army Corps of Engineers determined that a small
wetland, less than one acre, existed on the site. The Company disagreed with
this determination but decided to obtain a permit from the Corps to fill the
area and create a new wetland off-site. The permit was obtained and is, after
receiving an extension, valid through 1998. The work consists of moving less
than 400 cubic yards of soil, all within US Ecology's property. The State
advised the Company that such work would be considered to be unauthorized
pre-licensing construction and may be grounds for license denial. The Company
disputed the interpretation and has requested a declaratory judgment from the
Nebraska District Court.
LLRW PROCESSING AND RECYCLING SERVICES AT THE RECYCLE CENTER
The commercial processing and volume reduction segment of the LLRW services
market includes both fixed-based facilities and service capabilities performed
at the radioactive waste generator sites. The Company's processing and volume
reduction services are conducted under the auspices of its Recycle Center in Oak
Ridge, Tennessee.
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The Company acquired the Recycle Center from Quadrex Corp. in September
1994. The Recycle Center is equipped to process and recycle materials which are
contaminated with low levels of radioactivity. The Recycle Center provides
services primarily to nuclear power facilities, industrial nuclear generators
and the federal government. Historically, customers have included a substantial
number of public utilities. The Recycle Center's principal services include the
following:
NUCLEAR MATERIAL MANAGEMENT CENTER
The Nuclear Materials Management Center (NMMC) operation now has a market
edge in price and customer service. Current processing technologies linked with
burial in an all-inclusive pricing concept has proven to be a better option to
incineration.
LLRW Brokerage Services. The Company packages and transports small
quantities of LLRW from laboratories, hospitals, universities and other
commercial facilities to disposal facilities. The Company may contract with
low-level waste generators to pick up waste which is shipped to commercial LLRW
sites. The waste is either shipped by the Company in its own vehicles or is
shipped by common carriers under subcontract. The Company supplies many of these
customers with equipment and material for the packaging, labeling, and
transportation of the LLRW material. The packaging and transportation market is
highly competitive, and we have been steadily increasing our presence in the
market.
Metal Waste Decontamination. Radioactive contaminated metals exist
primarily in the form of large components such as pumps, valves, fuel racks, and
larger items such as condensers, heat exchangers and other large components. The
Recycle Center can decontaminate these metals through various techniques. New
investment in equipment provide for more aggressive decontamination processes
and higher throughput.
Dry Active Waste ("DAW") Processing. DAW processing services include volume
reduction and free release programs. This waste is primarily in the form of
plastics, clothing, and paper products. The Recycle Center uses its
super-compactor to reduce the volume of this waste before it is shipped for
disposal. The Recycle Center facility differentiates itself in this service by
compressing waste into bales prior to super-compaction. The combination of
baling and super-compacting accomplishes superior volume reduction. The Recycle
Center also sorts and segregates waste prior to super-compaction.
Green is Clean Program. In 1989, the Recycle Center initiated its free
release, or Green is Clean program. Under this program, generators place
potentially contaminated waste in yellow bags and potentially clean material in
green bags. The bags are then shipped to the Recycle Center for processing.
Waste certified as uncontaminated is disposed of in an industrial waste
landfill. Material that cannot be certified as clean is packaged for disposal at
a radioactive waste burial facility. This packaging process includes
super-compaction to facilitate significant volume reduction.
Remedial Services. The Field Services Division of the Recycle Center offers
a full range of turnkey services including site characterization, verification,
on-site volume reduction, license termination, decontamination and
decommissioning. The Recycle Center's staff has been involved in conducting
radiological decontamination projects for over 20 years. This highly experienced
staff has implemented multiple projects on time and within budget.
Scaffolding and Lead Management Services. During maintenance periods,
nuclear utilities require the use of scaffolding and lead blankets. The Recycle
Center maintains an inventory of approximately two million pounds of scaffolding
and 350,000 pounds of lead blankets. The scaffolding and lead blankets are
decontaminated, surveyed, refurbished, painted, and then rented to the customer.
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NUCLEAR EQUIPMENT SERVICE CENTER (NESC)
The Nuclear Equipment Service Center (NESC) provides refurbishment and
repair services for high value nuclear power plant electric motors and other
high value equipment. These services include decontamination, disassembly,
modifications, reassembly and testing to meet stringent client requirements for
safety and reliability. Additionally, the Company frequently provides field
services to nuclear power plants for removal, inspection, maintenance and
reinstallation of high value equipment.
Motors, valves, pumps and other components of nuclear power plants in the
United States require periodic maintenance which requires them to be
decontaminated before they can be refurbished. The Company can remove
contaminated winding insulation, decontaminate the motor stator and rotor, then
rebuild and test the motor with minimal outside service providers. The Company
believes that the NESC is the only major facility in the United States providing
a combination of all of these services.
Competition. The Company's competitors in the commercial LLRW processing
and recycling market include Scientific Ecology Group (recently purchased by GTS
Duratech), Chem-Nuclear Systems, Inc., Allied Technology Group, Inc., Frank Hake
and Associates, Inc., Alaron, Inc., and Manufacturing Sciences Company.
CLOSED FACILITIES
The Company's closed hazardous waste and LLRW disposal facilities are
described below.
Sheffield, Illinois Facility. The Company previously operated two hazardous
waste disposal sites at Sheffield, Illinois. The sites are located on property
owned by the Company on 45 acres adjacent to a closed state-owned LLRW site also
previously operated by the Company. One hazardous waste site was opened in 1974
and ceased accepting hazardous waste in 1983. A second closed hazardous waste
disposal site occupied less than five acres, and accepted hazardous waste
pursuant to Illinois authorization from 1968 through 1974. The two sites were
operated and are maintained under federal and state environmental regulations.
The Company also maintains a 20-acre LLRW disposal facility three miles
southwest of Sheffield, Illinois located on land owned by the State of Illinois.
The Company has closed the facility, which last received low-level waste in
1978, and is maintaining the site pursuant to a 1988 Agreed Order settling
long-standing litigation between the Company and the State of Illinois.
In 1984, the Company submitted for approval a closure and post-closure plan
for the hazardous waste disposal sites to the Illinois EPA and to the U.S. EPA.
The regulatory agencies have approved the Company's detailed program for
implementation and operation of comprehensive corrective action, but have not
approved the Company's closure and post-closure plan. The Company believes that
its closure and post-closure plan fully satisfies the health and safety needs of
the public and all regulatory requirements. The Company amended its closure plan
in 1996 to reflect up-to-date activities at the site. Review of the plan by the
Illinois EPA and the U.S. EPA is currently in progress.
In 1982, hazardous waste was detected in site-monitoring wells at one of
the two Sheffield facilities and as a result, the Illinois EPA requested that
the Company conduct an investigation of the site. The Company completed,
pursuant to a 1985 Consent Order, a Remedial Investigation and Feasibility Study
of the Sheffield facility. Pursuant to that order, a final Corrective Measures
Implementation Plan was issued by the U.S. EPA in October 1990 and the Company
is in the process of implementing this plan. The Company completed its source
isolation programs in 1994. The Company is currently renegotiating the terms of
the Corrective Measures Implementation Plan for groundwater monitoring and
extraction programs. A pilot air sparging system has been approved by the U.S.
EPA.
RCRA regulations also require the Company to carry environmental impairment
insurance against sudden and accidental occurrences, as well as against
non-sudden occurrences such as subsurface migration. See "Insurance". These
coverages are not available for the Sheffield, Illinois site due to its 1984
inclusion on the RCRA National Priorities List. Even though the site was removed
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from the list as a result of the consent agreement between the Company and U.S.
EPA, and the site has not received waste for 20 years, the site does not qualify
for environmental impairment insurance.
Maxey Flats, Kentucky Facility. Between 1963 and 1978, the Company operated
the Maxey Flats, Kentucky LLRW site, a facility that was owned, licensed and
maintained by the Commonwealth of Kentucky (the "Commonwealth"). In 1978, the
Commonwealth entered into an agreement with the Company to permanently close the
facility and the Commonwealth agreed, in part, to assume any and all liabilities
related to the facility and to exercise responsibility for perpetual care and
maintenance of the facility. The Commonwealth later filed a lawsuit against the
Company seeking to have that agreement declared invalid. The Company then filed
an action against the Commonwealth seeking cost recovery and contribution and to
enforce its rights under the agreement. After several federal court decisions in
favor of the Company on the issues, in July 1994, the Commonwealth and the
Company settled all pending litigation regarding the Maxey flats facility and
also agreed to cooperate in the resolution of any third party indemnification
claims against the Company from potentially responsible parties involved with
the facility. With the resolution of the Boston Edison vs. US Ecology case
discussed in Item 3, General Litigation, all third party indemnity claims
arising from Maxey Flats have now been resolved. The Company has recognized the
settlement terms in its 1997 financial statements.
REGULATION
The environmental services industry is subject to extensive regulation by
federal, state and local authorities. In particular, the regulatory process
requires the Company to obtain and retain numerous governmental permits or other
authorizations to conduct various aspects of its operations, any of which may be
subject to revocation, modification or denial. Adverse decisions by governmental
authorities on permit applications submitted by the Company may result in
premature closure of facilities or restriction of operations, which could have a
material adverse effect on the Company's results of operation.
Because of the heightened public awareness of environmental issues,
companies in the environmental service business, including the Company, may in
the normal course of their business be expected periodically to become subject
to judicial and administrative proceedings. The Company may also be subject to
actions brought by private parties or special interest groups in connection with
the permitting or licensing of its operations, alleging violations of such
permits, licenses or environmental laws and regulations.
The Company's business is heavily dependent upon environmental laws and
regulations which effectively require wastes to be managed in facilities of the
type owned and operated by the Company. The Company makes a continuing effort to
anticipate regulatory, political and legal developments that might affect its
operations, but is not always able to do so. Federal, state and local
governments have from time to time proposed or adopted other types of laws or
regulations which significantly affect the environmental services industry.
These have included laws and regulations to ban or restrict the interstate
shipment of hazardous wastes, impose higher taxes on out-of-state hazardous
waste shipments than in-state shipments and to reclassify certain categories of
hazardous wastes as non-hazardous. In particular, the federal government
currently is considering several fundamental changes to laws and regulations
that define which wastes are hazardous, that establish treatment standards for
certain wastes that could lead to their reclassification as non- hazardous, and
that revise the nature and extent of responsible parties' obligations to
remediate contaminated property. While the outcome of these deliberations cannot
be predicted, it is possible that some of the changes under consideration could
facilitate exemptions from hazardous waste requirements for significant volumes
of waste and alter the types of treatment and disposal that will be required. If
such changes are implemented, the overall impact on the Company's business is
likely to be unfavorable. The Company cannot predict the extent to which any
legislation or regulation that may be enacted or enforced in the future may
affect its operations.
Hazardous Waste Regulations. The Company is required to obtain federal,
state, local and foreign governmental permits for its hazardous waste treatment,
storage and disposal facilities. Such permits are difficult to obtain, and in
most instances extensive geological studies, tests and public hearings are
required before permits may be issued. In particular, the Company's operations
are subject to RCRA (as discussed below), the Safe Drinking Water Act (which
regulates deep well injection), TSCA (pursuant to which the EPA has promulgated
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regulations concerning the disposal of PCBs), the Clean Water Act (which
regulates the discharge of pollutants into surface waters and sewers by
municipal, industrial and other sources) and the Clean Air Act (which regulates
emissions into the air of certain potentially harmful substances). In its
transportation operations, the Company is subject to the jurisdiction of the
Interstate Commerce Commission and is regulated by the DOT and by state
regulatory agencies. Employee safety and health standards under the Occupational
Safety and Health Act ("OSHA") are also applicable to the Company's operations.
RCRA. Pursuant to RCRA, the EPA has established and administers a
comprehensive, "cradle-to-grave" system for the management of a wide range of
solid and "hazardous" wastes. States that have adopted hazardous waste
management programs with standards at least as stringent as those promulgated by
the EPA may be authorized by the EPA to administer their programs in lieu of the
EPA.
Under RCRA and federal transportation laws, all generators of hazardous
wastes are required to label shipments in accordance with detailed regulations
and prepare a detailed manifest identifying the material and stating its
destination before shipment off site. A transporter must deliver the hazardous
wastes in accordance with the manifest and generally only to a treatment,
storage or disposal facility having a RCRA permit or interim status under RCRA.
Every facility that treats or disposes of hazardous wastes must obtain a RCRA
permit from the EPA or an authorized state and must comply with certain
operating standards. The RCRA permitting process involves applying for interim
status and also for a final permit. The Company believes that each of its
facilities is in substantial compliance with the applicable requirements
promulgated pursuant to RCRA.
It is possible that the EPA may consider a number of fundamental changes to
its regulations under RCRA that could facilitate exemptions from hazardous waste
management requirements, including policies and regulations that could implement
the following changes: redefine the criteria for determining whether wastes are
hazardous; prescribe treatment levels which, if achieved, could render wastes
non-hazardous; encourage further recycling and waste minimization; reduce
treatment requirements for certain wastes to encourage alternatives to
incineration; establish new operating standards for combustion technologies; and
indirectly encourage on-site remediation. Because many of these initiatives are
in various stages of development and implementation, the Company cannot predict
the final outcome of EPA decisions or the extent of their impact on the
Company's business.
Superfund. Superfund provides for immediate response and removal actions
coordinated by the EPA to releases of hazardous substances into the environment,
and authorizes the federal government either to clean up facilities at which
hazardous substances have created actual or potential environmental hazards or
to order persons responsible for the situation to do so. Moreover, Superfund
grants a right of recovery to private parties who incur costs in response to the
release or threatened release of hazardous substances. Superfund has been
interpreted as creating strict, joint and several liability for costs of removal
and remediation, other necessary response costs and damages for injury to
natural resources. Liability extends to owners and operators of waste disposal
facilities (and waste transportation vehicles) from which a release occurs,
persons who owned or operated such facilities at the time the hazardous
substances were disposed, persons who arranged for disposal or treatment of a
hazardous substance at or transportation of a hazardous substance to such a
facility, and waste transporters who selected such facilities for treatment or
disposal of hazardous substances.
It is possible that the U.S. Congress could revise the Superfund statute in
the future. In addition to possible changes in the statute's funding mechanisms
and provisions for allocating cleanup responsibility, it is possible that
Congress could fundamentally alter the statute's provisions governing the
selection of appropriate site cleanup remedies, conclude not to continue
Superfund's current reliance on stringent technology standards issued under
other statutes to govern removal and treatment of remediation wastes or could
adopt new approaches such as national or site-specific risk based standards.
These and other potential policy changes could significantly affect the
stringency and extent of site remediation, the types of remediation techniques
that will be employed, and the degree to which permitted hazardous waste
management facilities will be used for remediation wastes.
LLRW Regulations. The LLRW services of the Company are also subject to
extensive governmental regulation. Various phases of the Company's LLRW services
are regulated by various state agencies, the Nuclear Regulatory Commission
("NRC") and the DOT. Regulations applicable to the Company's operations include
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those dealing with packaging, handling, labeling and routing of radioactive
materials, and prescribe detailed safety and equipment standards and
requirements for training, quality control and insurance, among other matters.
Employee safety and health standards under OSHA are also applicable to the
Company's operations.
Financial Assurance and Site Maintenance. The Company operates its
hazardous waste disposal sites under RCRA permits. The LLRW sites are operated
under licenses from state and, in some cases, federal agencies. When one of
these facilities reach capacity, or lease or license termination dates, the
facility must be closed and maintained for a period of time prescribed by law or
by license. In the case of the RCRA-permitted hazardous sites, federal
regulation requires that operators demonstrate the financial capability to close
sites on an immediate, unscheduled (worst-case) basis. The estimated costs of
such a closure are set forth in the operator's RCRA closure and post-closure
plan.
Financial assurance requirements for closure/post-closure plans may
generally be satisfied by various means, including insurance, letters of credit,
surety bonds, trust funds, a financial net worth test and/or a corporate
guarantee. The Company is currently satisfying such requirements through a
combination of certain of the various allowable methods. Cash and investment
securities totaling $14.3 million and $16.4 million at December 31, 1997 and
1996, respectively, have been pledged as collateral for the Company's closure
and post-closure obligations, performance of a Remedial Investigation and
Feasibility Study and performance of corrective action at the closed Sheffield,
Illinois facility, compliance with the TNRCC requirements related to the
Company's non-commercial use deepwell at its Robstown, Texas facility, closure
costs for Beatty, Nevada site, closure costs for the Recycle Center, closure
costs for the Winona, Texas facility, test borings at the proposed LLRW sites in
Nebraska and California, settlement with generators of waste at the Richland,
Washington LLRW facility and other general performance bonds. The amounts
pledged by the Company generally equal the present value of its estimated future
closure and post-closure obligations.
INSURANCE
The Company believes it operates professionally and prudently, however, the
environmental business exposes the Company to many risks. The risks include
potential harmful substances escaping into the environment causing damage or
injury. An insurance program has been reviewed and put into place that under its
insurance policies, the Company generally has self-insured retention limits or
deductibles. These range from $25,000 to $250,000 and include fully insured
layers of coverage above such retentions or deductibles. The nature of the
Company's business exposes it to accidental environmental contamination losses
which are generally not covered by primary casualty insurance programs. To
provide insurance protection for environmental claims the Company has obtained
environmental impairment liability insurance and professional environmental
consultants liability insurance for non-nuclear related occurrences. For
radioactive risk, the Company has purchased nuclear liability insurance covering
operations of its facilities, suppliers and transporters. In addition, the
Company has purchased primary casualty and excess liability policies all through
traditional third party insurance.
Pursuant to RCRA, the Company is required to maintain environmental
impairment liability insurance coverage with specified minimum limits for sudden
and non-sudden accidental occurrences. The Company is in compliance with
required limits and coverage with the exception of the Sheffield, Illinois site
where such insurance has been unavailable. See "Closed Facilities".
In 1987, the Company organized and funded a wholly-owned subsidiary,
American Liability and Excess Insurance Company ("ALEX") to reinsure financial
assurance insurance for the Company's closure and post-closure responsibilities
at certain of its sites. ALEX is currently reinsuring financial assurance for
closure and post-closure of the Company's facilities and underwriting a
performance bond for one of the Company's subsidiaries. ALEX has funded cash
reserves representing the approximate present value of the closure or
post-closure obligation being insured. As of December 31, 1997, the ALEX
investment portfolio was approximately $8 million.
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CUSTOMERS
Revenues resulting from the cost reimbursement contract with the Central
Interstate Low-Level Radioactive Waste Commission were approximately $7,579,000
or 18% and $5,711,000 or 11% in 1997 and 1996, respectively, of the Company's
consolidated revenues. No other single customer accounted for 10% or more of the
Company's consolidated revenues for 1997, or 1996.
PERSONNEL
The Company had a total of 305 employees as of March 13, 1998. The Company
has collective bargaining agreements which cover 11 employees at its Richland,
Washington facility and 67 employees at its Oak Ridge, Tennessee facility. The
Company believes that its relationship with its employees is good.
At the Oak Ridge facility the Company ended negotiations for a new contract
with OCAW local 3-983 February 10, 1998 with a strike by all 67 bargaining unit
employees. The facility continued to operate with supervisory non-union staff
until employees asked to return to work on March 2, 1998 under the terms and
conditions of the old contract.
The Company submitted a final proposal on March 4, 1998 which was rejected
by OCAW local 3-983. On March 5, 1998 the Company notified the OCAW that the
parties were at impasse and implemented the final proposal which was effective
at midnight on March 7, 1998. Bargaining unit employees continue to work under
the terms and conditions of the Company's final proposal.
The reasons for the strike were economic. In an effort to return
profitability to the facility the Company asked the bargaining unit employees to
accept wages and benefits in line with the rest of the Corporation. The OCAW
benefit package is superior and less costly to each OCAW employee, than the
benefit package available to other employees. During contract negotiations, the
benefits were a key issue, along with wages, vacation and attendance issues.
ITEM 2. PROPERTIES
The Company believes that its property and equipment are well-maintained,
in good operating condition and adequate for the Company's present needs. The
Company's headquarters are located in Boise, Idaho in leased office space. The
Company also leases sales and administrative offices in Washington, California,
Nebraska, Illinois, Nevada, Texas, and Kentucky.
The following table sets forth certain information regarding the principal
operating, treatment, processing or disposal facilities owned or leased by the
Company.
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LOCATION FUNCTION ACREAGE OWN/LEASE UTILIZATION
-------- -------- ------- --------- -----------
CHEMICAL SERVICES
- -----------------
Beatty, Nevada Hazardous Waste Disposal Facility 80 acres Lease 100%
Houston, Texas Westheimer Office 33,800 sq. Lease(1) 0%
ft.
Houston, Texas Katy Freeway Office 11,000 sq. Leased/Sublet 0%
ft.
Pasadena, Texas Transportation Facility 3 acres Own 100%
Pasadena, Texas Storage Yard 2 acres Lease(2) 100%
Robstown, Texas Transportation Facility 1 acre Own 100%
Robstown, Texas Waste Disposal Facility 400 acres Own 100%
Robstown, Texas Future Expansion Area 40 acres Mortgage 100%
Winona, Texas Closed facility March 17, 1997 620 acres Own 10%
LLRW SERVICES
- -------------
Oak Ridge, Tennessee LLRW Processing Facility 16 acres Own 100%
Richland, Washington LLRW Disposal Facility 100 acres Lease 100%
- --------
(1) This office space was vacated in about March 1996. Please refer to Item 3.
Legal Proceedings for discussion regarding the Westheimer lease from Houston
Office 88.
(2) The leased storage yard has been released back to the landlord, as of
December 31, 1997.
The principal properties of the Company make up less than 10% of the total
assets. The assets that are utilized are sufficient and suitable to the
Company's needs. The Company is planning for expansion at the Robstown, Texas
Hazardous and Non-Hazardous Waste Disposal Facility. There are only two cells
remaining on the currently permitted 240 acres. The adjoining 160 acres is
reserved for expansion but is not yet permitted.
All of the owned properties and assets of the Company are pledged to Chase
Bank of Texas as a part of the banking and loan agreement. Details of the debt
agreement are provided in Note 7, to the financial statements.
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ITEM 3. LEGAL PROCEEDINGS
The Company's business inherently involves risks of unintended or
unpermitted discharge of materials into the environment. In the ordinary course
of conducting its business activities, the Company becomes involved in judicial
and administrative proceedings involving governmental authorities at the
federal, state and local levels. In the majority of the situations where
regulatory enforcement proceedings are commenced by governmental authorities,
the matters involved relate to alleged technical violations of licenses or
permits pursuant to which the Company operates, or, of laws and regulations to
which its operations are subject, or, are the result of different
interpretations of the applicable requirements.
In addition to the litigation described below, the Company and certain of
its subsidiaries are involved in other civil litigation and administrative
matters, including permit application proceedings in connection with the
established operation, closure and post-closure activities of certain sites.
Management has established reserves for certain of the matters discussed
below, and for certain anticipated legal fees, based on management's estimates
of the outcome. During the course of legal proceedings, estimates with respect
to the matters may change. While the outcome of any particular action or
administrative proceeding cannot be predicted with certainty, management is
unable to conclude that the ultimate outcome, if unfavorable, of the litigation
and other matters described below, will not have a material adverse effect on
the operations or financial condition of the Company.
GENERAL LITIGATION
VIRGIE ADAMS, ET AL V. AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORPORATION, ET
AL, CAUSE NO. 236-165224-6, TARRANT COUNTY, TEXAS DISTRICT COURT. On August 30,
1996, Plaintiffs amended their August 6 complaint naming over 677 additional
plaintiffs and 87 defendants, including the Company, several of its subsidiaries
and customers of its former Winona, Texas facility. The Plaintiffs are seeking
damages, punitive damages and pre-and post-judgment interest based on claims of
negligence, negligence as a matter of law, fraudulent concealment, assault and
battery, intentional infliction of emotional distress, res ipsa loquiter and
intentional tort. Plaintiffs allege the Company "...failed to handle, treat,
store, blend, inject, and otherwise dispose of extremely hazardous and highly
toxic substances in a manner...constitut(ing)...compliance with basic health,
safety and environmental standards." The Company believes it conducted its
operations in accordance with applicable laws and regulations, that the lawsuit
is without merit and intends to vigorously defend the action. The Company's
insurance carrier is defending this matter. The case is currently stayed pending
the issuance of a scheduling order.
HOUSTON OFFICE 88, INC. V. AMERICAN ECOLOGY CORPORATION V. ALTRA ENERGY
TECHNOLOGIES, L.L.C. , DISTRICT COURT OF HARRIS COUNTY, TEXAS, CASE NO.
96-47050. Plaintiff in this matter is the landlord of the former corporate
headquarters for the Company. The suit was based upon the Company's vacation of
lease premises prior to lease termination. The Plaintiff/landlord sought $52,543
per month in rent, escalations, parking and sales tax on parking for the period
beginning July 1, 1996. The lease termination date is December 7, 2002.
On January 13, 1998, the court granted a motion for summary judgment in favor of
Houston Office 88 in the amount of $2,044,346 and against the Company on its
counterclaims. Although presently an interlocutory order, Houston Office 88 has
moved to sever its claim against the Company, which, if granted, will make the
judgment final. The Company plans to file a motion to set the judgment aside
and, if denied, plans to file an appeal.
The Company filed a third-party complaint against Altra Energy for failure to
consummate a sublease agreement. The court also granted a summary judgment
against the Company and in favor of Altra Energy Technologies, L.L.C. on the
Company's third-party claims against Altra. The Company's motion to set such
judgment aside has been denied. The Company plans to file an appeal.
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AMERICAN ECOLOGY ENVIRONMENTAL SERVICES CORP., ET AL V. MILDRED KRUEGER, ET AL,
U. S. DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS, DALLAS DIVISION, CIVIL
ACTION NO. 3-96-CV-2670-D. The Company and two of its subsidiaries, American
Ecology Environmental Services Corporation (AEESC) and US Ecology Corporation
(USE), filed suit in the U.S. District Court for the Northern District of Texas
against the Defendants seeking an award of actual and punitive damages proven at
trial and treble damages, costs and attorneys fees as allowed under the federal
racketeering statutes and for appropriate injunctive relief including an order
compelling Defendants to cease their improper activities, retract their
defamatory statements and to refrain from similar improper activities. The
Complaint alleges that the Defendants: violated the Racketeer Influenced and
Corrupt Organization Act (RICO) statute, defamed AEESC, USE and the Company
through various publications and statements; tortuously interfered with existing
contractual rights and prospective business relations of AEESC, USE and the
Company; disparaged the businesses of AEESC, USE and AEC; engaged in a civil
conspiracy for improper purposes to cause the closure of AEESC's Winona, Texas
facility; and abused both the administrative and judicial processes within
Texas. The case is based on the activities of Phyllis Glazer and a non-profit
corporation organized by Glazer, her husband, mother, and Glazer's Wholesale
Drug Company, Inc. (dba Glazer Distributors), all of whom are defendants. The
action alleges that Defendants fraudulently sought to deprive Plaintiffs of
their property by publishing misleading and defamatory statements about
Plaintiffs and their business operations, and that the Defendants have conspired
among themselves to force the closure of the Winona facility for their own
pecuniary gain by engaging in a pattern of maliciously disseminating clearly
false and defamatory statements concerning the Plaintiffs' businesses and by
repeatedly abusing judicial proceedings solely for the purpose of damaging the
reputation and financial health of Plaintiffs. Defendants have answered the
complaint denying liability and counter-claiming for damages for abuse of
process, alleging Plaintiffs have attempted to deny Defendants' right of free
speech. M.O.S.E.S., a non-profit corporation, claims actual and punitive damages
in excess of $1,000,000 based on alleged reputational damage, reduced income (in
the form of reduced contributions) and costs of legal representation.
Notwithstanding its decision to close the Winona facility, the Company intends
to vigorously prosecute this case to its conclusion. Extensive discovery by both
the Company and the Defendants is ongoing in preparation for trial, currently
scheduled for August 1998.
BOSTON EDISON COMPANY V. US ECOLOGY, INC., U.S. DISTRICT COURT FOR
MASSACHUSETTS, CIVIL ACTION NO. 95-12173. In October 1995, Boston Edison filed a
complaint against US Ecology, a subsidiary of the Company, in the U.S. District
Court of Massachusetts alleging claims related to various costs arising out of
the shipping and burial of waste materials at the Maxey Flats Nuclear Disposal
Site. US Ecology had entered into a series of contracts with Boston Edison to
provide radioactive waste disposal services at this site. Boston Edison claimed
that US Ecology breached the contracts by failing to indemnify Boston Edison for
its costs. Boston Edison also alleged that US Ecology committed unfair and
deceptive trade practices in Massachusetts by not indemnifying Boston Edison.
Finally, Boston Edison sought a declaratory judgment that would set forth the
contractual rights and liabilities of the parties. Boston Edison claimed
$600,000 in past and future costs for the alleged breach of the contracts,
trebled under the Massachusetts Deceptive Trade Practices Act. US Ecology
successfully moved the case from Massachusetts to federal court in Kentucky.
On February 23, 1998, US Ecology and Boston Edison agreed to a full a complete
settlement of this litigation. US Ecology agreed to pay Boston Edison specified
annual payments of $25,000, $25,000, $40,000, $40,000 and $200,000 beginning
September 1, 1998 and ending September 1, 2002, plus $100,000 after the first
anniversary of operations at the Company's planned Ward Valley facility, if it
is opened.
JAMES D. MONCRIEF, ET AL V. GIBRALTAR CHEMICAL RESOURCES, INC., ET AL, DISTRICT
COURT OF SMITH COUNTY, TEXAS, CIVIL ACTION NO. 92-1942-C. MARIAN STEICH, ET AL
V. GIBRALTAR CHEMICAL RESOURCES, INC., ET AL, DISTRICT COURT OF SMITH COUNTY,
TEXAS, CIVIL ACTION NO. 93-054309. MICHAEL WILLIAMS, ET AL V. GIBRALTAR CHEMICAL
RESOURCES, INC., ET AL, DISTRICT COURT OF SMITH COUNTY, TEXAS, CIVIL ACTION NO.
93-2304-C. TANGEE E. DANIELS, ET AL V. ATRIUM DOORS AND WINDOWS, INC., ET AL,
DISTRICT COURT OF DALLAS COUNTY, TEXAS, CIVIL ACTION NO. 95-091459-L. Each of
the above-identified cases, together with the Adams case discussed above,
involve AEESC, a subsidiary of the Company, and its Winona, Texas facility. As
discussed elsewhere herein, AEESC has decided to close that facility
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permanently. Each of these cases seeks unspecified damages for various causes of
action, including trespass, nuisance, negligence, gross negligence, and in some
cases, fraudulent concealment and fraud. The Plaintiffs claim that they suffered
personal injuries and property devaluation as a result of alleged releases of
toxic or harmful chemical substances into the environment from the facility.
With respect to each of the cases, the Company believes it has conducted its
operations in accordance with applicable laws and regulations, that each of the
lawsuits is without merit and intends to vigorously defend each. In the
Moncrief, Steich, Williams and Daniels cases, AEESC is relying upon its
predecessor parent corporation's insurance coverage for defense and indemnity
purposes. The Moncrief case was tried to a jury in October 1996. The jury
awarded damages in the amount of $18,000 on the Plaintiffs' nuisance claim only.
Plaintiffs appealed the verdict requesting a new trial. The Williams case was
dismissed with prejudice by the trial court May 12, 1997 because Plaintiffs
failed to file affidavits identifying injuries and causes suffered as required
by the Court's Case Management Order. Plaintiffs' motion for a new trial was
denied. Plaintiffs have appealed. Defendants are similarly seeking dismissal of
the Daniels case based on the inadequacy of the affidavits filed in that case
under a similar Case Management Order. The Court has not yet ruled on
Defendants' motion, and the case is currently stayed. The Court ordered the
parties in the Steich case to mediation, which settled on January 27, 1998 for
payment of $350,000 to plaintiffs by the Company's predecessor's insurance
company.
PERKINS COIE V. AMERICAN ECOLOGY CORPORATION, SUPERIOR COURT, KING COUNTY
WASHINGTON, CASE NO. 97-2-30472-5SEA. This is an action to collect an alleged
balance due for legal services provided to American Ecology and its subsidiaries
between 1993 and 1997 allegedly in the amount of $669,987, including interest.
An answer to the complaint has been filed and discovery has commenced. The
Company intends to defend the action on the basis of certain legal defenses and
to negotiate a structured settlement, if possible. Trial is set for June, 1999.
In the event of an adverse outcome, management does not believe there would be a
material adverse impact in the Company's earnings.
PEOPLE OF THE STATE OF ILLINOIS EX REL. JAMES E. RYAN, ATTORNEY GENERAL AND
THOMAS W. ORTCIGER, DIRECTOR OF THE ILLINOIS DEPARTMENT OF NUCLEAR SAFETY V.
AMERICAN ECOLOGY CORPORATION AND US ECOLOGY, INC., CASE NO. 97MR30. On November
3, 1997, the State of Illinois sued the Company and US Ecology in the Circuit
Court of Bureau County, Illinois for failing to provide $2,000,000 in letters of
credit as a financial assurance bond in regard to the Company's closed
Sheffield, Illinois LLRW facility and to prevent the Company from transferring
the site to the state as scheduled in May 1998. In 1988 the Company settled the
long-standing litigation with the State of Illinois regarding this facility. In
accordance with the settlement agreement, the Company has maintained the
facility and paid to Illinois nearly $2,500,000 to be used for long term care of
the facility after title is transferred to the state in May 1998. The settlement
agreement also obligates the Company to provide a letter of credit in a
decreasing amount, which is presently $123,000 to secure certain closure costs
if the Company fails to meet certain financial tests relating to working
capital, debt-equity ratio and net worth. The state claims that the Company has
failed to meet some or all of these tests and that this letter of credit thus is
required. The state has also claimed that a second letter of credit in the
amount of $1,900,000 is also required because the financial covenants have not
been met and that the provision of both letters of credit is a precondition to
the state's acceptance of the site.
The Company has argued that it should not be required to provide the decreasing
letter of credit since any failure to meet the financial covenants which may
exist is likely to be temporary and the site is scheduled to be transferred to
the state in May 1998 in any event. The Company offered to extend the Company's
maintenance period for a limited time in lieu of providing this letter of
credit, but this offer was rejected. The Company has asserted that the
$1,900,000 letter of credit is only required when both (a) one or more of the
environmental triggering events listed in the settlement agreement have
occurred, and (b) the financial tests are not met. The state does not allege
that any of these environmental triggering events has occurred, and the Company
believes that the likelihood of such an event ever occurring is remote. Although
the state has taken a contrary position, the Company believes that the
settlement agreement clearly excludes the posting of the letters of credit as a
condition of transfer of the facility and that the Company has performed all the
conditions required for transfer. The Company expects to defend the lawsuit on
the basis of these arguments. At this time it is not possible to predict the
outcome of this matter.
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ENVIRONMENTAL MATTERS
IN RE RAMP INDUSTRIES, INC. SITE (COLORADO), U.S. ENVIRONMENTAL PROTECTION
AGENCY, DENVER, REGION 8. US Ecology responded to a CERCLA 104(e) Information
Request in March 1996 sent by USEPA to numerous Potentially Responsible Parties
("PRP"). Thus far, US Ecology has not been formally named as a responsible party
at the CERCLA site, but the EPA issued a preliminary finding of liability by US
Ecology of $28,993 on September 8, 1997. Hazardous substances may have been sent
by US Ecology to the site from the Company's former operations warehouse in
Pleasanton, California. No determination as to ultimate liability can be made at
this time and no formal action has been initiated beyond the information
requests and preliminary determination of liability.
IN THE MATTER OF U.S. DEPARTMENT OF ENERGY, US ECOLOGY, INC., RCRA DOCKET NO.
WA7 89000 8967. EPA issued Hazardous and Solid Waste Amendments to a Final RCRA
Permit No. WA7 89000 8967, issued August 29, 1994 to the U.S. Department of
Energy for the Hanford Federal Reservation, which purports to impose obligations
on various parties, including, potentially, USE. USE has sought review of permit
condition III.B., identifying certain disposal units operated by USE as Solid
Waste Management Units subject to investigation and corrective action. USE also
sought review of all other conditions of the HSWA portion of the permit,
including definition "g" to the extent that it defines "facility" or "site" to
include leased lands, and including Attachments A-F, to the extent that they set
forth the requirements that would be applicable to the USE site. After
negotiations with the EPA, the appeal was dismissed at the joint request of USE
and the EPA, without prejudice to either party's right to reinstate the appeal
if settlement is not achieved. USE and the Washington Department of Ecology have
contractually agreed to investigate the integrity of the site to determine
whether and what remedial action, if any, is appropriate. The Company
anticipates gathering the requisite data in 1998. At this time it is not
possible to predict the outcome of this matter.
OTHER MATERIAL LITIGATION
The following two cases, in which one of the Company's principal
subsidiaries is a plaintiff against the United States, are not required to be
reported under the Securities and Exchange Commission regulations, but we have
chosen to do so because of the potential significant impact one or more
favorable results would have on the Company's Ward Valley project.
US ECOLOGY, INC. V. UNITED STATES OF AMERICA, UNITED STATES COURT OF FEDERAL
CLAIMS, CASE NO. 97-65C. This case, commenced on January 30, 1997, by US Ecology
is against the United States of America for breach of a contract to sell 1,000
acres of federal land located in Ward Valley, California to the State of
California. California granted US Ecology a license to construct and operate a
regional low-level radioactive waste disposal facility at the Ward Valley site.
US Ecology is seeking damages in the amount of approximately $73,100,000 for its
past costs expended and unspecified future lost profits, lost opportunity costs,
lawful interest and costs incurred in the action. The first claim for relief is
breach of an express contract which arose when the Secretary of Interior made a
determination that all requirements under federal law and regulation necessary
prior to the land transfer had been met and the United States accepted payment
of the purchase price for the land in January 1993. Subsequently, a different
Secretary of Interior refused to complete the transaction and continues to
refuse to convey the land to California. US Ecology is a third-party beneficiary
of the contract because it was chosen to operate the facility. The second claim
for relief is breach of a contract which, by law, may be implied from the United
States having induced US Ecology to incur substantial costs, when US Ecology was
led to believe the United States would act fairly and honestly in conducting
requisite reviews, in granting approval of the transfer, and in conveying title
to the land upon completion of the review process in accordance with federal law
and regulation. Since 1988 the United States has made a number of determinations
regarding the sites' suitability for sale and subsequent use as a LLRW disposal
facility site. Notwithstanding those determinations, the United States refused
and continues to refuse to transfer title of the land to California so the
facility can be constructed. US Ecology intends to aggressively pursue its
damage claims in this matter. Cross motions for summary judgment were argued
February 3, 1998. The Court's decision as to the existence and breach of
contract and third party beneficiary status of US Ecology is expected within the
first half of 1998.
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US ECOLOGY, INC. V. U.S. DEPARTMENT OF THE INTERIOR, ET AL, U.S. DISTRICT COURT,
DISTRICT OF COLUMBIA, CASE NO. 1:97CV00365. This case, commenced on February 24,
1997, is based on the same operative facts as those of the breach of contract
claims brought in the U.S. Court of Federal Claims by US Ecology. This complaint
is similar to that brought by the California Department of Health Services
against Bruce Babbitt, Secretary of Interior, the U.S. Department of the
Interior and the U.S. Bureau of Land Management. US Ecology seeks relief in the
form of a writ of mandamus compelling the Secretary of Interior to convey title
to the land at Ward Valley, California to California, in accordance with the
lawful determinations made by his predecessor in office. Additionally, US
Ecology is seeking judgment against the Defendants that their purported
rescission of the prior Secretary's decision and their continuing failure to
deliver title to the land is unlawful, arbitrary, an abuse of discretion and
beyond their statutory authority and that therefore their actions hindering and
delaying the transfer should be set aside, including a decision to engage in a
Supplemental Environmental Impact Statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's security holders during the
fourth quarter of 1997.
PART II
ITEM 5. MARKET FOR AMERICAN ECOLOGY CORPORATION COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
American Ecology Corporation common stock is currently listed on the NASDAQ
National Market System under the symbol ECOL. As of March 23, 1998, there were
approximately 7,600 record holders of common stock. The high and low sales
prices for the common stock on the NASDAQ and the dividends paid per common
share for each quarter in the last two years are shown below:
1997 1996 Dividends Per Share
---- ---- -------------------
PERIOD High Low High Low 1997 1996
---- --- ---- --- ---- ----
1st Quarter 3 1 3-1/2 1-7/8 $ -- $ --
2nd Quarter 1-7/8 1 2-1/2 7/8 -- --
3rd Quarter 2-1/10 1-1/2 1-9/16 7/8 -- --
4th Quarter 1-7/8 1-1/4 1-5/16 15/16 -- --
The Company's amended credit facility with its bank lender prohibits cash
dividends on common stock.
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ITEM 6. SELECTED FINANCIAL DATA
AMERICAN ECOLOGY CORPORATION
This summary should be read in conjunction with the consolidated financial
statements and related notes.
(Dollars in thousands, except per share amounts)
YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Revenues $ 41,522 $ 49,972 $ 67,895 $ 71,891 $ 60,312
% Increase (decrease) in revenues from prior year (16.9)% (26.4)% (5.6)% 19.2% (15.0)%
Net income (loss) (1) $ (676) $(11,407) $(48,903) $ 3,850 $ 4,744
Basic earnings per share $ $ (1.47) $ (6.12) $ $
(.17) .48 .57
Shares used to compute income (loss) per share (000's) 8,163 7,907 7,826 7,851 8,097
Working capital (deficit) $ (16,930) $(16,693) $(16,115) $ 1,563 $ 4,771
Total assets $ 98,431 $ 99,027 $114,125 $155,439 $ 108,122
Long-term debt, net of current portion $ 39,872 $ 36,202 $ 28,357 $ 33,493 $ --
Shareholders' equity $ 13,380 $ 13,604 $ 22,024 $ 67,045 $ 63,564
Long-term debt to total capitalization as a percentage 74.9% 72.7% 56.3% 33.3% --%
Current ratio (current assets divided by current liabilities) 0.4:1 0.4:1 0.6:1 1.0:1 1.2:1
Return on average equity (5.0)% (64.0)% (109.8)% 5.9% 8.0%
Dividends declared per common share $ $ $ .025 $ $
-- -- .10 --
Capital spending, including capital expenditures and site
development costs $ 3,442 $ 5,659 $ 8,445 $ 8,035 $ 12,558
Depletion, depreciation and amortization expense $ 3,106 $ 5,383 $ 7,319 $ 6,279 $ 4,356
Per SFAS 128 basic earnings per share is restated. (1) 1996 expenses
include $7,451 in impairment losses on long-lived assets for the Winona facility
and 1995 includes $33,048 in impairment losses on long-lived assets for the
Recycle Center, WPI Waste Processors and the Winona facility.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion contains trend information and other forward
looking statements that involve a number of risks and uncertainties. The
Company's actual results could differ materially from the Company's historical
results of operations and those discussed in the forward looking comments.
Factors that could cause actual results to differ materially are included, but
are not limited to, those identified in Notes to the Consolidated Financial
Statements herein, Part I, Item 3. Legal Proceedings, and the discussion below.
The following discussion and analysis should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Form 10-K.
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CAPITAL RESOURCES AND LIQUIDITY
In the last three years the Company has incurred losses from operations,
and has had continuing difficulty in generating enough cash to meet the
obligations of doing business. In 1995, and then again in 1996, the Board of
Directors provided a capital infusion, in exchange for preferred stock of
American Ecology Corporation. These infusions totaled $8 million, and still the
ongoing losses have resulted in working capital deficits of $16,930,000,
$16,693,000, and $16,115,000 for the years 1997, 1996, and 1995, respectively.
The Company made a Rights Offering in late 1997, and completed it February
10, 1998. This offering had positive support from the shareholders as $2,912,000
of new cash was generated. This offering was placed in conjunction with the
terms of the banking agreement, that provided for the Company to use its best
efforts to raise additional capital. That offering was therefore considered
successful as a total of $2,000,000 of new capital was raised. Please see Note 9
describing the total effect of the Rights Offering.
The Company cannot be certain about its ability to improve short-term
operating results. The Company's financial statements as of December 31, 1997,
contain no adjustments to the asset carrying amounts but, certain reserves have
been made for litigation issues as explained in Note 13. Management's actions
and plans to address these issues are as follows:
Credit Agreement
The Company has made no changes to its Credit Agreement since the Third
Amended and Restated Credit Agreement was executed on December 31, 1996. This
Credit Agreement extends the maturity of the credit agreement to December 31,
2000, and modifies certain other terms. A description of the Credit Agreement as
so amended has been filed as an Exhibit with the Securities and Exchange
Commission. As of December 31, 1997, the Company had borrowed all amounts
available under its Credit Agreement except for $3.1 million in interest to be
accrued in 1998 and added to the loan balance.
National Stock Market Exchange
The Company received a letter dated February 27, 1998 from the NASDAQ Stock
Market, Inc. This letter explained that with the new market value of public
float requirement, American Ecology Corporation will need to either regain
market position or be faced with a possible de-listing. The Company believes it
is taking the best position possible, but the results can not be predicted at
this time.
Strategic Plan
The Company has adopted a strategic plan focusing on its low-level
radioactive waste services. Its hazardous and non-hazardous waste disposal and
processing operations are reported as Chemical Services. The Company is
continuing to improve as reorganized under those respective service divisions.
The reorganization that started in 1996, was to facilitate potential strategic
alliances with other companies that may provide additional sources of capital
and open greater opportunities. The Chemical Services has not been as profitable
as LLRW services. There are many factors causing these results. These areas of
concern are discussed in both the MD&A and Item 1. Business.
Senior Management Changes
On February 13, 1998 Joe Nagel was elected as the new President and Chief
Operating Officer of American Ecology Corporation.
Measures to Reduce Costs
Management has been implementing a very aggressive plan since 1995, where
the Company has sized up its position to the surrounding market, where customer
potentials have been measured, where managing the Company can be improved and as
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a result, unprofitable divisions have been either eliminated or reorganized to
be efficient and effective. The reorganized divisions have been dissected and
analyzed to measure break-even points, maximum revenues from customers, and
optimum operating levels to maximize profitability. These variables of operation
for the Company have been adjusted and measured to fit the changing times of the
environmental industry. As discussed in Item 1. Business, the waste generators
are generating less waste now due to both Federal and State constricting the
areas in the regulations where generators were relaxed about disposal practices.
These environmental proceedings and regulations have forced all of the
environmental companies to evaluate their part in the industry. The outcome in
many areas is difficult to forecast, but the management of the Company and the
strategic plans include the flexibility to adapt to these industry changes.
The Chemical Services division has not been profitable in over two years.
This performance is being monitored very closely, and the changes to compensate
for these lost earnings are being implemented strategically, so not to upset the
monthly revenues. AET Transport, has focused on servicing transportation for
both hazardous and non-hazardous customers in the Gulf Coast market. This market
has been on the decline and it has been difficult for the Company to be
successful from the Houston, Texas area. The Company is in the process of
relocating these operations to the Robstown, Texas area to work in conjunction
with Texas Ecologists landfill. This effort will result in further layoffs of
personnel and a further reduction of direct costs to the transportation
business.
At the Winona facility, the Company will continue to close the facility
under both State and federal regulations. The Company has been cleaning the site
and the equipment to maximize the proceeds from the sale of these assets. These
proceeds from the sale are being used to fund the efforts of further closure and
post-closure. This effort helps offset the negative cash flow at this Winona
site. There can be no assurance that the sale of the assets will result in a
favorable outcome, and there may still be a need for the Company to supply
additional funding for the Winona site through the closure and post-closure
periods.
The Company continues to evaluate the viability of certain other
operations, and their current potential to perform at an acceptable level of
profitability.
In the plan, a new budget was made for 1998. Capital expenditures were
limited in 1997 and for 1998 to the development of the Ward Valley Project,
certain regulatory obligations, and required operational repairs.
The Company believes its plan will improve both cost structure and
operating results. However, considering the Company's recent losses and
insufficient cash flow from operations, there can be no assurance that this plan
will resolve the Company's liquidity problem in a timely fashion.
Future Considerations
As a result of the changes to its management and operations in 1997, and
the implementation of the business plan, the Company believes that the future
operating results of its existing LLRW businesses will improve, although no
assurances can be given that such improvements will occur. The Company will
continue with the Chemical Services but the losses being suffered may require
immediate attention in 1998.
The Company is currently in negotiations, for the disposition of legacy
waste with the State of Tennessee Department of Environment and Conservation
division of Radiological Health. Legacy waste, for purposes herein, is that
waste that was on site when the Company acquired Quadrex and waste since
generated by the Company and not disposed of. The objective of negotiating with
the State of Tennessee DEC is to come to a reasonable term for both parties to
remove this waste. The Company has processed most of the waste but does not have
the cash flow to pay for disposal costs. The Company signed a contract February
24, 1997 with another disposal company that is licensed to accept this waste.
The terms of this agreement include paying an additional amount of approximately
$800,000 to dispose of legacy waste before May 1998. The terms are such that the
Company is responsible for the payment even if it does not dispose of $800,000
of waste. This arrangement will provide for a considerable cost savings to
dispose of the legacy waste. In September 1997, the Company made a complete
count and reevaluation of the inventory liability at the Oak Ridge, Tennessee
Recycle Center. The count was thorough and included all aspects of the costs
included to process and remove the waste from the facility. The largest hurdle
is for the Company to have enough cash available to pay for the disposal. The
Company has provided for a recorded liability in the amount of $5,567,000 for
the waste processing and burial of waste now on site at the Recycle Center. The
Company
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continues to seek alternative methods of disposal that may be less costly and
still within federal and state regulations. Should the Company be unsuccessful
in these attempts, it is believed that there is an adequate accrual reserved.
In addition, the Company expects to receive federal income tax refunds of
approximately $740,000 during 1998.
RESULTS OF OPERATIONS - 1997 VS. 1996
The Company as a whole has shown improvement in operations since 1995, but
continues to report a loss. In 1997, the Company is reporting a Net Loss of
$676,000 before preferred stock dividends of $760,000. This compares to losses
of 11,407,000 and 48,903,000 for 1996, and 1995. The following table allows for
a comparison of the two service groups without consolidated corporation costs or
the captive insurance company ALEX.
In the discussions for Net Earnings (Loss), Revenues, Operating Costs and
Selling, General and Administrative (S,G&A) Expenses, comparisons are made for
all three years for the Consolidated Statements of Operations 1997, 1996, and
1995.
These comparisons reflect the changes made as a result of the
reclassification of costs between the operating and S,G&A costs. In the years
before 1997, Surecycle was included as a part of the Winona facility until the
Winona facility was closed. Also, in 1995, the discussions reflect AET
Transportation results that include costs of Transtec, American Ecology Services
Corporation, and Waste Processors Incorporated, all of which have had little to
no activity since 1995.
NET EARNINGS (LOSS)
Reported in $000
CHEMICAL SERVICES
Teco Beatty AET Trans Surecycle Winona Total
---- ------ --------- --------- ------ -----
Year End 1997 (104) (333) (986) (19) (1,684) (3,126)
Year End 1996 427 (1,385) (1,160) 0 (11,491) (13,609)
Year End 1995 859 (2,654) (9,748) 0 (8,488) (20,031)
LLRW SERVICES
Richland AERC Mid West CIC Compact Sheffield Total
-------- ---- -------- ----------- --------- -----
Year End 1997 3,367 265 (127) 375 0 3,880
Year End 1996 1,679 (3,407) 883 314 (224) (755)
Year End 1995 791 (28,292) 821