In a previous blog entry, I noted the idea of calculating the ratio of a company’s environmental remediation reserve to spending in the last fiscal year. A ratio of 10:1 would show some long-term thinking about liabilities, while a ratio of 2:1 might deserve some analysis and confirmation.

Looking at a recent bankruptcy with significant environmental liabilities, I wondered if an investor could spot a problem using this ratio.

Tronox was a publicly-traded spin off of the Kerr-McGee Company, which had an IPO in November 2005. In January 2009, Tronox Chapter 11 filed for reorganization, listing$1.6 billion in assets and $1.2 billion in liabilities, leaving shareholder equity of about $0.4 billion. From their 2007 annual report, Tronox announced an environmental reserve balance of $188.8 million as of 12/31/2007 and fiscal year 2007 spending of $50.2 million. At the 2007 spending rate, the reserve would last another 3.76 years.

Tronox was clear about several matters in their 2007 10-K filing – cost overrun allocation with Kerr-McGee, the pending reimbursements from future spending, even the recent reserve increases – to demonstrate transparency to their shareholders. Two tough questions: was $189 million enough? Was four years enough?

Some years later, we might learn what a reasonable environmental reserve should have been, but the number in place in December 2007, $189 million, was already a big drain on Tronox’s $430 million in stated shareholder equity. On August 2009, the SEC 8-K filing showed the shareholders equity was already marked down to-$159 million, and that the environmental reserves were larger and not decreasing any time soon.