EME Solutions Environment, Management & Engineering Optimizing the Environmental Due Diligence Process Angela Libby Jankousky (303) 279-7647, [email protected]@home.com.

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EME SolutionsEnvironment, Management & Engineering

Optimizing the Environmental Due Diligence Process

Angela Libby Jankousky(303) 279-7647,

[email protected]

For Executive Enterprises October 20, 2000

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Presentation Goals

Why do environmental due diligence?

Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing

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Why Do Due Diligence?

To accurately value the business by:

Uncovering anything that affects the Decision to acquire the business Price Structure and terms of the deal

$$$

$$$

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Why do EHS* Due Diligence

Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability

$$$

$$$

*Environmental, Health and Safety

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An Iterative Process

Structure of the deal drives the process Start: assume all liabilities are your

client’s And they’re wretched

. . . Then back off As data indicate liabilities are not so bad

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CERCLA Liability

Who: “Potentially Responsible Parties” Current & former owners and operators Companies that arranged for disposal Transporters Generators

Retroactive and Strict Liability Joint and Several Liability

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Only 3 Defenses

Act of warAct of God Innocent Land Owner Defense

(‘86) Purchaser did not know and had no

reason to know about the contamination Catch 22

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The Big Bang

Include current sites, former sites, disposal sites.

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A Cautionary Tale

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Why do EHS Due Diligence?

Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability

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For Continuing Operations

Guilty: Knowing Violation

Guilty: Should Have Known

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Compliance Audit Strategy

Noncompliance(s) discovered: Plan to correct immediately, or

Disclose to EPA under Audit Policy Reduced gravity-based penalties

Penalty for economic benefit No recommendation for criminal

prosecutionSee www.epa.gov/oeca/ore/apolguid.html Effective 5/11/00

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Compliance Audit Strategy

Noncompliance(s) not discovered: But suspected

Incorporate into corporate audit system May have more than 21 days to report

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States w/ Audit Privilege and Immunity Laws (6/1/00)

ColoradoSouth DakotaKentuckySouth CarolinaMinnesotaNew

HampshireWyoming

OhioUtahMontanaTexasAlaskaKansasNevada

VirginiaNebrask

aMichiganIowaArizonaIdaho

Source: Katheryn Jarvis Coggon, Holme Roberts & Owen, LLP

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Environment, Health & Safety

Innocent land owner defense Environmental baseline Civil and criminal liability Tap remediation funds Impact of upcoming regulations Understand product liability

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Impact of Upcoming Regulations

Material costs should be disclosed

Examples of potentially high cost issues Air Toxics regulations Montreal Protocol requirements (CFCs) Ergonomics Issues

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Johns Manville’s Lesson

“I cannot possibly say how many companies are putting themselves and their employees and customers at this kind of risk today. I think I do know that voluntary product stewardship adds up to competitive advantage over the short term and a greatly improved chance of survival and profit into the future.”

-- Bill Sells, HBR March-April 1994

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Product Liability Issues

Recent bankruptcies Dow Corning (silicone breast implants) Owens Corning (asbestos)

Future Issues ??

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Presentation Goals

Why do environmental due diligence?

Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing

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Evolving Due Diligence Process

500 BC Caveat emptor

1651 AD The buyer needs a hundred eyes,

the seller not one. G. Herbert

1986 CERCLA Section 101(35)(B)

(From ABA’s Journal of Natural Resources & Environment, Fall 2000, Bruce Ray, ed.)

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What happens if we buy the contaminated property?

“It would be baaaaad!!”

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Post-CERCLA Evolution

Chaos The beginnings of

standardization ASTM standards (1993) Today

Check off the environmental box Tailor process to the transaction

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Due Diligence Costs, Timing

Phase II

Phase I

Identify Acqu isition Target

$1.5K - $7K/site

$10K- $$$!/site

One month

At least onemore month

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Due Diligence Cost Factors

Phase I Complex site history Site Location (travel costs) Complexity of neighbors Availability of local records Consultant expertise

Phase II Scope of sampling Cost of expediting samples

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Presentation Goals

Why do environmental due diligence?

Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing

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Std Practice for Environmental Site Assessments: Phase I

“To define good commercial and customary practice for conducting an environmental site assessment”

ASTM E 1527 -- 00

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ASTM E 1527 -- 00

Intent: innocent landowner defense

Not designed to assess business environmental risk

www.astm.org

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Phase I Environmental Site Assessment

Records ReviewSite ReconnaissanceInterviewsReport

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Records Review

Standard Environmental Record Sources

Additional Environmental Record Sources

Physical Setting Sources Historical Use Information

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Standard Environmental Records

Federal NPL site list Federal CERCLIS list

CERCLIS NFRAP list RCRA facilities list

RCRA generators list RCRA TSD facilities list

Federal ERNS list State NPL list

State CERCLIS State registered USTs

State Leaking UST lists

State landfill & solid waste disposal lists

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Local Environmental Records

Data listsBrownfield sites

Data sourcesDept. of Health/Environ.

Lists of landfill sitesLists of haz waste sitesRecords of wellsUST listsLocal land recordsRecords of Emergency release reports

Fire Dept.Planning DeptLocal/Regional AgenciesLocal Electric CompaniesBuilding Inspection /Permit Dept

(not exhaustive)

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Physical Setting Sources

Required USGS 7.5 Minute Quad Map

Discretionary Groundwater maps Bedrock geology maps Soil maps Others

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Historical Use Information

Develop a history of the property All obvious uses of the property from

present1940 orFirst use

Whichever is earlier

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Standard Historical Sources

Aerial photographs Fire insurance maps Property tax files Recorded land title records USGS Quad Maps Local Street Directories Zoning/Land Use Records Other: including maps, newspaper

archives, personal recollections, etc.

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Phase I Environmental Site Assessment

Records ReviewSite ReconnaissanceInterviewsReport

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Site Reconnaissance

Observation: Exterior and Interior Identify Uses

Current and past uses Current and past uses of adjacent property

Conditions Geologic, Hydrogeologic, Hydrologic Topographic Structures Roads Potable Water Supply Sewage Disposal System

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Site Uses -- Observations

Geologic, hydrologic and topographic conditions

Condition of structures

Potable water supply Sewage disposal Waste disposal Ponds, pools of liquid

Use, storage of petroleum prods.

Storage tanks Odors Drums PCBs

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Building -- Observations

Heating/Cooling & fuel source

Drains and sumps

Pits Stained soil or

pavement

Stressed vegetation Solid Waste Storage Tanks Wells Septic Systems Stains or Corrosion

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Phase I Environmental Site Assessment

Records ReviewSite ReconnaissanceInterviewsReport

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Those who may be interviewed

Key site manager Site Occupants Environmental or safety

professionals Site Corporate

Those with info re: previous practices

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Interviewee Balancing Act

Desire to be:TruthfulHelpfulLoyal to pro-spective emp.

Desire to be:Loyal to employerProtective of past mistakes

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Interview Questions

Location/ existence of other documents Audit reports Site assessments Permits Questions that follow from record review

Current and previous disposal practices Any pending or threatened

proceedings?(Not an exhaustive list)

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Interviews w/ Gov’t Officials

To obtain information indicating recognized environmental conditions

Local Agencies to be Interviewed Fire Department Hazardous Waste Disposal Health Agency

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Phase I Environmental Site Assessment

Records ReviewSite ReconnaissanceInterviewsReport

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Report Should Contain

The scope of services Findings of known or suspect en.

conditions Opinion with rationale Conclusions Summary of deviations (if any) References Signature

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ASTM Phase I “Non-scope” Considerations

Asbestos Health and Safety

Radon Ecological resources

Lead-Based Paint Endangered Species

Lead in Drinking Water

Indoor air quality

WetlandsRegulatory Compliance

Cultural resourcesHistoric resources

Industrial Hygiene High voltage power

lines

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Post ASTM Phase I

Get a rough estimate of liabilities Consultant’s understandable

reluctance Huge error bars around these

estimates

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Lesser Liability Range

0 1 2 3 4 5

Spill

UST Leak

Asbestos

Lead Paint

Radon

Potable H2O

EMF

Indoor Air

Permit Transfers

$ Millions

PotentialTypical

Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.

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More Costly Potential Liabilities

0 20 40 60 80 100

Oth. Soil Cont.

Groundwater

Off-Site Disp

CFCs

Noncompliance

Fines

Occ Exp

Haz Prods

Millions

Potential Typical

Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.

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Overlapping Interests

Envir. Consult.Comfortable w/ASTMReluctant to estimate costsWould like to do a Phase IIWants repeat business

Buyer’s MgtWants answer

Tolerates uncertainty,

depending on the structure of the deal

Generate CostsWith error bars

& probabilities

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Is Phase II Necessary?

No sig. liabilities

Can be managed

contractually?

Phase I

Maybe.Need more data

No. Deal killers

Phase II

Yes.

Potentiallysignificant liabilities

Develop aStrategy foreach issue

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Presentation Goals

Why do environmental due diligence?

Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing

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Confidential Due Diligence

Confidentiality for Public Transactions See Minimizing Risks in Public Company

Mergers and Acquisitions, Judith A. Walkoff and Eric B. Rothenberg, Natural Resources and the Environment, Fall 2000

SEC disclosures www.sec.gov/edgarhp.htm Materiality Threshold Different Interpretations

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Relying on Representations and Warranties

Interview Corporate Environmental Staff Understand their FAS 5 process Environmental Management Systems Corporate Audit Program Review web page, enforcement records Safety as a barometer of performance

www.osha.gov/cgi-bin/est/est1

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Seller’s Environmental Staff

Torn between Auditioning for a job Internal tensions regarding disclosure Knowledge of past mistakes Absence of knowledge

Design enterprise due diligence scope After conversations with seller’s staff

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Representing the Seller

Well organized data room Desk-top Phase I Relevant permits, audits, other

records Access to those with the answers

Trained to understand their role

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Presentation Goals

Why do environmental due diligence?

Historical evolution Standard (ASTM) process Enterprise-wide due diligence Framework for optimizing

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Value-Added Due Diligence

Objective:Max: $ Increased Value of the Deal –

$ Cost of environmental due diligence

Constraints Find any deal killers Find all leverage opportunities Provide information on time Preserve confidentiality Allocate scarce due diligence resources Preserve Innocent Landowner Defense

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Scoping Environmental Due Diligence

Involve Environ. Professionals early Specify the objective

Collaborate to design a scope Get cost estimates

Conduct next phases When data are necessary for the deal

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Trade Offs

Increased RiskSketchy Information

Inflated Purchase PriceRequest Indemnities

Higher CostBetter InformationAccurate Purchase Price

Minimal Due Diligence

Extensive Due Diligence

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The Optimal Due Diligence

Fits the transactionEvolves with the

transaction And may change the transaction

Post acquisition integration