Why Frisco’s Lead Clean-up is Now Tied to California Courts

by jim on April 24, 2013

Stock topteboard declineSmelling green, lawyers suing on behalf of Exide shareholders have begun to flock to the Golden Gate state's courts to file lawsuits alleging the company lied to purchasers of stock about the substantial environmental liability of the company's Vernon smelter, recently cited as presenting the highest cancer risk of any industrial facility in Southern California.

At last count there were at least five separate law firms preparing to sue, alleging Exide has…

"…violated certain provisions of the Securities Exchange Act of 1934. Specifically, the complaint alleges that defendants misrepresented and/or failed to disclose that, among other things: (a) the Company was polluting the environment and exposing almost 110,000 residents near its Vernon, California battery recycling facility with potentially fatal levels of arsenic and other pollutants; (b) the Company knew that it would not be able to meet its debt repayment obligations and other pledges and promises based on actual and projected revenues and expenses; and (c) the Company knew that its environmental liabilities, debt obligations and potential insolvency did not support Exide’s statements to investors. According to this complaint, when these facts were finally revealed to the market, Exide’s shares plummeted by approximately 46%.

This isn't the first, or even the second or third time the company has had these kinds of problems. As it turns out, Exide has a history of financial shakiness and corporate irresponsibility:

Despite market dominance, Exide lost about 75% of its share value from 1996 to 1998. Some shareholders sued management, alleging misrepresentation, and the Florida attorney general and the SEC launched probes into whether the company sold used batteries as new. (In 1999 Exide settled with Florida without admitting wrongdoing, and it also settled with shareholders.) In 1998 management clumsily announced a recapitalization attempt and then changed its mind. Amid these problems, Hawkins resigned as chairman and CEO and former Chrysler exec Robert Lutz replaced him.

In 1999 Exide canceled a contract with Sears (4 million batteries a year) to focus on profits rather than volume. Later that year Exide sold its Speedclip division to Prestolite Wire. In 2000 it acquired the global battery business of Pacific Dunlop (now Ansell Limited), GNB Technologies. Exide also sold its remanufactured starter and alternator business (Sure Start).

In 2001 Exide agreed to a plea deal with federal prosecutors whereby the company would pay out $27.5 million in fines over five years. The company admitted to making defective batteries, covering up the defects, and bribing a Sears, Roebuck buyer. Burdened with heavy debt, Exide also announced in 2001 that it planned to issue 20 million new shares in a debt-for-equity deal. That year the company changed its name from Exide Corporation to Exide Technologies.

In 2002 Exide filed for Chapter 11 bankruptcy reorganization as a result of its acquisitions bender and poor conditions in the automotive sector. Later in the year Exide inked a deal to become the exclusive battery supplier to Volvo Truck Australia, giving the battery maker a 74% market share for heavy truck batteries in Australia.

Arthur Hawkins, the former CEO of Exide, was convicted in 2002 of fraudulently selling defective batteries to Sears Automotive Marketing Services. He was sentenced to 10 years in federal prison; the sentence was upheld in 2005. Three other Exide executives were convicted of various federal charges.

When Exide emerged from Chapter 11 bankruptcy in 2004, the company had cut its debt by a reported 70%. That year the company combined its motive power and network power operations into one segment, industrial energy.

While Exide exited Chapter 11, it still experienced corporate pain — the company continued to lose money, and it shut down its lead-acid battery manufacturing plant in Shreveport, Louisiana, in 2006. The plant served Ford Motor and other aftermarket customers. The Shreveport factory was operating since 1968. Production was shifted to other Exide facilities.

Guess what lucky North Texas community helped pick up Exide's slack?

So this is the corporate entity the City of Frisco reached an agreement with concerning the "outer ring" of the Exide lead smelter in that town, also other wise known as the "J" parcel. As it turns out, that agreement gives the company a big financial incentive to clean up that part of their property and hand it over to the City for development. Exide is counting on getting $45 million from the City when the clean-up of the "J Parcel is given the Good Housekeeping Seal.  To put that amount in perspective, 2013 second quarter operating income for Exide was only $6.8 million.

So if Exide is as greedy and needy as their record indicates, that J Parcel will be spic and span. But that's not the land the smelter and all of Exide's tons of lead smelter waste is on. That's on the approximately 100 acres smack dab in the middle of the J Parcel and central Frisco that Exide will still own. And there's no City deal to make sure that contaminated property is ever cleaned up.

Now add the current round of financial troubles Exide is in and there's absolutely no incentive for the company to spend money on the kind of state-of-the-art clean-up Frisco residents say they want. In fact there's a huge disincentive. Frisco is a former Exide smelter site with no discernable assets and all sorts of long-term expensive liabilities. And if Exide goes belly-up, the City will find itself at the end of a long line of creditors, beginning with the shareholders who have the best lawyers, with little luck in recovering the money necessary to do a proper cleaning and closure.

The solution? Perhaps a little pro-active planning on Frisco's part could make sure the money is there to clean-up the worst of the worst contamination in a timely way. Requiring Exide to put up a bond pre-bankruptcy, or maybe taxing hazardous waste disposal by the pound are two possible paths that come to mind. Unless the City does something like this, and soon, it's central downtown development, and ambitious Grand Park plans will be forever held hostage to the fate of a company that's looking less and less viable with each passing day.

UPDATE: It was announced Wednesday that the State of California has ordered the Vernon smelter closed because the facility has "been continuously releasing hazardous waste into the soil beneath its plant because of a degraded pipeline" along with poisoning an unacceptable cancer risks.

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