Environmental Counterparty Tracking Services - Brochure

CONFIDENTIALEnvironmental Counterparty Trackingp y gContact:John RosengardJohn Rosengard(415) 982-3100www.erci.com© 2012 Environmental Risk Communications, Inc.Outline? Need for Environmental Counterparty Tracking? Principles for an Environmental Counterparty Tracking Process? Process Overview? Process Overview? Business Case / Value Proposition Analysis? Deployment Process? Path Forward© 2012 Environmental Risk Communications, Inc. 2Need for Environmental Counterparty Tracking? Environmental cleanups are long-term? 5 to 15 years in design and remediation phasesNormal Default: 1.4%/yearRandomized for Allocationp? 30+ years in O&M? Financial risk sets in over time: bankruptcies will remove 1.4% / annually of the PRP allocation Allocationannually of the PRP allocation from a given group each year? In a large group, after 30 years, only 65.5% will remain (see hi )graphic)? Calculating counterparty risk is required under FASB 157(f), now in GAAP as “ASC 410-30-25-12 Randomized for Allocation and Credit Ratingin GAAP as ASC 410 30 25 12 Uncertainties Related to the Allocation of Estimate“© 2012 Environmental Risk Communications, Inc.3Counterparty Risk – Current US Accounting Standards ? ASC 410-30-30-1(b):? Assess the likelihood that other potential responsible parties will pay their full allocable share of the joint and several remediation liability.? ASC 410-30-30-7:? An entity should assess the likelihood that each potentially responsible party will pay its allocable share of the joint and several remediation liability. That assessment should be based primarily on the financial condition of the participating potentially should be based primarily on the financial condition of the participating potentially responsible party. This assessment requires the entity to gain an understanding of the financial condition of the other participating potentially responsible parties and to update and monitor this information as the remediation progresses. The entity shall include in its liability its share of amounts related to the site that will not be paid by th t ti ll ibl ti th tother potentially responsible parties or the government.© 2012 Environmental Risk Communications, Inc. 4Principles for an Environmental Counterparty Tracking Process? Transparent: Each PRP is tested equally, using an agreed process? Timely: Minimize cycle time to respond promptly to changes; do not defer analysis for fully-audited financial statements? Simple: Use 3rd-party credit scoring service, transparent criteria, with backup analysis if a PRP is in special circumstances? Value-Adding: Current cost projections are aligned to related uses? Reserve-setting by individual PRPs? Financial assurance required by State or Federal agencies? Cashout calculations? Bankruptcy affidavits concerning future cost projections© 2012 Environmental Risk Communications, Inc. 5Process Overview• Request & Primary Test:D & B ScoresSecondary Test: 10K Data ReviewTertiary Test:EPA ABEL Model Negotiate Cash Out SettlementEvaluate the PRP’s financial condition using EPA’s ABEL M d l (40 CFR Evaluate and report on two specific Dun & Bradstreet scores, evaluate financial reports from companies that failed Primary Test• Review financial Fail FailFAIModel (40 CFR 264.151),compare to agreed metrics• Review financial data for available cash and cash flow from continuing operations, Provide alternative form of Financial Assurance [e.g., FailILp ,potential trends, and/or parent ownership parent guaranty, letter of credit, insurance]FailPAPAPAPACompany Meets Environmental Counterparty SSSSSSSS© 2012 Environmental Risk Communications, Inc. 6Tracking RequirementsBusiness Case for Environmental Counterparty Tracking? Monetizes the future cash calls of the riskier parties? Defers need for healthy PRPs to recognize credit risk of riskier parties? If a PRP does file bankruptcy, financial assurance instrument settles liability ? If a PRP does file bankruptcy, financial assurance instrument settles liability quickly and the PRP group avoids filing a claim or preferential payment claw-back? If “agency financial assurance” is required by a government entity, this process provides a credit-weighted basis for allocating the compliance cost? Compliance with GAAP as “ASC 410-30-25-12 Uncertainties Related to the Allocation of Estimate” © 2012 Environmental Risk Communications, Inc. 7Value Proposition to the PRP Group:o Ten member PRP GroupNo Action B Common Co nsel ERCIpo Each PRP has 10% allocationo $1 million in future cash callso Random range of credit ratingsNo Action By Common Counsel ERCICommon Counsel $0 $16,00040 hours/quarter, $100/hr$0Dun & Bradstreet (DNBi) $0 $6,000 $0( )Costs$ $ ,10 DNBi Reports/quarter, $150 per report$ERCI $0 $0 $15,000$1,500 per PRP, monthly DNBiPRP Group Costs Due to ECT Failure$0 to $100,000 $0* $0*Recoveries in Chapter 11 ($50 000 to $0) $0* $0*Recoveries in Chapter 11 ($50,000 to $0) $0 $0Total $0 to $100,000 $22,000 $15,000© 2012 Environmental Risk Communications, Inc. 8* Assumes DNBi Report review prevents all defaultsDeployment Process? Engage PRP group, modify PRP agreement? Develop / refine a site’s “future cost model” ? QC for comprehensiveness, standard use of inflation, and discount ratesQ p , ,? Inclusion of typical project escalation risks, exclusion of “risk premium” issues? Assemble each PRP’s allocation and corporate parent information? Include known and probable recoveries? Include known and probable recoveries? Determine update cycle (annually, unless an ASC 410-30-25-15 benchmark occurs )? Activate DNBi® database (D&B)? Use the proper corporate entity; advise PRPs if they are proposing a dissolved or ? Use the proper corporate entity; advise PRPs if they are proposing a dissolved or poorly-rated or consolidated entity with no financial statements (complete guarantees)? Test each entity ? Complete Primary Secondary and Tertiary Criteria Tests ? Complete Primary, Secondary, and Tertiary Criteria Tests ? Report to the PRP Group and bring failing PRPs to workout stage? Complete reviews every quarter© 2012 Environmental Risk Communications, Inc. 9Path Forward? Issue an Environmental Counterparty Tracking package:? Process flow diagram? PRP responsibilities? Successors / assigns documentation form? Assumption, guarantee, and indemnification forms? Standard Letter of Credit languageg g? Budget for Environmental Counterparty Tracking:? Startup Estimate: Number of PRPs x ~$1,500 (minimum $10,000)? Follow on work: One-time analysis bankruptcy affidavits major updates to future cost ? Follow on work: One time analysis, bankruptcy affidavits, major updates to future cost model and/or agency financial assurance statements? Startup phase is approximately 30 days, and will require cooperation of common counsel and PRP employees© 2012 Environmental Risk Communications, Inc. 10