Environmental Perspectives - Exponentannounce.exponent.com/practice/environmental/2010winter/Winter_… · ENVIRONMENTAL PERSPECTIVES Bankruptcy and Environmental Liability Assessment

Environmental PerspectivesW I N T E R • 2 0 1 0

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Bankruptcy and Environmental Liability Assessment

Mark Johns, Ph.D., P.G., LG

A P U B L I C A T I O N O F E X P O N E N T ’ S E N V I R O N M E N T A L A N D E C O S C I E N C E S P R A C T I C E SENVIRONMENTAL P E R S P E C T I V E S

Bankruptcy is becoming common in today’s economic climate1, and evaluating the costs for environmental liabilities can be a critical issue in bankruptcy court. Such liabilities can pose a significant risk to the financial health of U.S. businesses2. The acknowledgment of this risk is reflected in recent changes to accounting standards that require companies involved in mergers and acquisitions to report certain contingencies, including environmental liabilities, at fair market value3.These standards require the recognition of environmental cleanup obligations that, under former accounting standards, may have fallen into the “cannot be reasonably estimated” category or were accrued at the lower end of the estimated range4. Understanding fair-value measurement of environmental liabilities is quickly becoming an important business issue, as it may call into question the solvency of some companies.

The scope of a Chapter 11 reorganization is very broad, and binds all creditor claims to those that occurred before the date that the Chapter 11 plan was confirmed. Courts consider not only the debtor’s loans and payables, but also contingent and off-balance-sheet liabilities. Creditors typically view environmental liabilities as reducing their potential claims, while the debtor must demonstrate that estimates are reasonable. Appropriate resolution requires defensible estimates of future potential costs during bankruptcy proceedings.

Companies are reviewing allocations of contingent liabilities, which may have been developed under older accounting standards that used lower thresholds. Exponent consultants are using our knowledge of remediation technology, risk assessment, and economic tools in evaluating environmental liabilities for companies both before and after bankruptcy. The market value or expected value calculations typical for mergers and acquisitions are also used in the evaluation of these liabilities for bankruptcy court.

Technical Approaches to Meet the Challenge

Exponent staff have experience with quantifying environmental liabilities at a wide variety of sites and locations. Many years of CERCLA-related feasibility study cost analyses provide a platform from which to develop realistic cost estimates for potential future liabilities. More importantly, our staff have direct experience with implementing remedial actions and the responsibility associated with managing budgets for these activities. We often form multidisciplinary teams from our ecological, environmental, toxicological, and civil/construction practices that can approach difficult cost estimation problems from different angles to meet clients’ needs.

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Methods

If a company is reorganizing under bankruptcy law or is involved in a merger or acquisition, they must evaluate the forward-looking contingent liabilities that they carry. ASTM Standard 2137-065 is commonly used as an underlying basis for estimating potential costs and liabilities for environmental matters. This standard presents a hierarchy of approaches that include, in order of increasing robustness or comprehensiveness: no estimate, known minimum value, most likely value (MLV)/range of values, expected value (EV), and quoted price. These five methods require different levels of technical information and estimations of uncertainty.

It is clear that both the robustness and comprehensiveness of an estimate are increased with more knowledge, but uncertainties must be taken into account. For example, an engineer’s estimate to solve a technical issue (e.g., the technology to clean up a plume so it will not reach a river) may include assessment of a number of technologies; however, if the probability that the outcome (the plume reaching the river) will occur is low, then the estimate makes little contribution to the assessment.

Feasibility studies like those performed under CERCLA typically evaluate a spectrum of remedial actions and provide cost estimates that cover a wide range of remedial action alternatives from no action to very

expensive, maximally protective actions to mitigate improbable risks. In bankruptcy, unrealistic outcomes are of no value because the court needs a fair market estimate for the liabilities at a site. Environmental liability estimates, therefore, must reflect only realistic outcomes with likely probabilities of occurring. Three typical methods for estimating fair market value are summarized as follows:

• ASTM Method—Portfolio analyses have included the application of the ASTM Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters (ASTM E2137-06). This technique goes beyond the standard feasibility study evaluation and requires expert input to develop appropriate fair market remedial estimates. Moreover, the use of data generated in compliance with ASTM E2137-06 should be relied on by private sector decision-makers when negotiating commercial transactions, including but not limited to financial lending institutions and insurance carriers assessing risks and costs associated with such transactions. The ASTM method incorporates sources of uncertainty, understanding that multiple outcomes often exist for a given issue. This method allows for an initial screening of costs and the identification of areas where more information is required.

• Decision Tree—Environmental liability costs can be calculated using a decision tree approach, where realistic outcomes and probable costs are linked to their probability of occurrence. This approach is used to calculate the mean value for a site where multiple outcomes are probable. Expert input is used to determine the likelihood of specific remedial actions, the actual, site-specific need for these actions, and hence the probability of their occurrence. This is typically performed by an individual or team that has direct experience in a variety of remedial activities and their outcomes. A simplified decision tree (Figure 1) shows that this technique provides a concise, visual method to convey information about uncertainty and cost.

Probability

Soil remediationat 100 home sites

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Figure 1. Example future cost decision tree

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• Probabilistic Analyses—Simulation modeling using Monte Carlo analysis is another approach for estimating costs. For this type of probabilistic analysis, cost estimates for individual items6 in the overall cost estimate for a given site are bounded by upper and lower limits, with an estimated distribution7 within the selected range. Like any model, the input must be reliable and needs to be based on sound professional judgment and relevant data. This method provides a statistical basis for estimating remedial costs with associated probabilities of occurrence.

The cost estimates for a single site are determined by the activities that make up a remedial action (see Figure 2 for an example). The output provides a probabilistic distribution of total estimated costs allowing the finder of fact to understand both the likelihood of a given cost estimate as well as the uncertainty around that estimate. Monte Carlo simulations can also be run for portfolios of sites where remedial actions at individual sites are combined. For example, existing or legacy environmental contamination with associated regulatory obligations can be used to determine the potential environmental exposure or “risk capital”. These financial cleanup obligations in the form of legacy risk are used to determine the amount of capital at risk for a company’s portfolio of sites (Figure 3).

A Recent Example

The recent and very large trial of ASARCO LLC (ASARCO) in U.S. Bankruptcy Court for the Southern District of Texas, Corpus Christi Division, provides a good example of the complexities of evaluating contingent environmental liabilities. The case involved a large number of sites in 19 states and Canada, with claims of incurred and prospective environmental liabilities of approximately $3.6 billion8. The variety of site conditions required economic evaluation by a range of experts including people experienced with site specific remedial actions, remedial costing, environmental liability evaluation, and forecasting. Exponent was involved in aspects of the case on behalf of the Official Committee of Unsecured Creditors. The first task was looking at the expected value for the portfolio of custodial sites, i.e., those that consisted of certain owned, non-operating properties. The second task consisted of an evaluation of the costs associated with the Omaha Lead Site Superfund site in Nebraska.

In ASARCO’s Chapter 11 bankruptcy reorganization trial, held in May 2009, environmental liabilities were evaluated by many experts, using different cost estimating techniques. Both the creditors and debtors reviewed and evaluated the environmental liabilities and the estimated future costs of cleanup. Understandably, this was quite a detailed and difficult task considering the wide variety of sites and

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Figure 2. Monte Carlo simulation for remedial actions at a single site showing 50%, 80%, and 95% confidence levels and expected value

Figure 3. Risk capital evaluation of remedial activities for a portfolio of sites

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issues, the quality and quantity of information available, and the number of jurisdictions, both state and federal. The evaluation included the types of future potential remedial actions, as well as the quantities and unit costs of materials to be remediated.

The smelter and residential yard remediation that was performed at the Omaha Lead Superfund Site under the direction of the U.S. Environmental Protection Agency (EPA) was closely scrutinized by experts at the ASARCO trial.9 At the forefront of concerns was the lack of a conceptual site model, which resulted in recontamination of properties after extensive and expensive remediation had been performed. EPA had instituted a residential yard remediation program at 2,710 homes without considering the potential impact from lead-based paint on many of the homes. Essentially, the removal actions that EPA had undertaken between 2002 and 2007 had failed, as paint flaking and chipping was found to have recontaminated 50 percent of the yards that had been previously remediated. The assessment of remedial options was incomplete because it did not consider other contributions to yard contamination. A comprehensive decision tree analysis, together with a conceptual site model, would have considered these contributions. This would have resulted in a more rigorous remedial action, prioritization of remedial activities, and a reduction in overall cost.

1. According to the American Bankruptcy Institute, business bankruptcies rose from 28,745 in 2007 to 43,546 in 2008. Business filings for the 9-month period ending September 30, 2009, totaled 45,510, exceeding the number for the full year of 2008. See American Bankruptcy Institute at http://www.abiworld.org/.

2. Dirty Secrets by Marie Leone and Tim Reason, CFO Magazine, September 1, 2009.

3. See FASB Staff Position (FSP) 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, April 1, 2009.

4. Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, March 1975 by the Financial Accounting Standards Board.

5. ASTM E2137-06 Standard Guide for Estimating Monetary Costs and Liabilities for Environmental Matters.

6. For example, for a probabilistic cost estimate for a sediment remediation site, individual items that varied for each simulation included sediment volume, cost per unit volume for dredging, dewatering, treatment, hauling and disposal.

7. Typical distributions are normal, triangular, or lognormal.

8. The claims register included 129 pages and 19,241 registered claims at https://www.asarcoreorg.com/claimsregister.aspx?CaseID=112.

9 Daily Environment Reporter, June 6, 2009.

For more information, please contact Dr. Mark Johns at 425-519-8732 or [email protected]. This article is not intended to provide legal advice.

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Managing Coal Ash Risks

Anne Fairbrother, D.V.M., Ph. D. Gary Bigham, L.G. Jaana Pietari, Ph.D. Joyce Tsuji, Ph.D., DABT

The United States will continue to depend heavily upon coal for production of electricity for at least the next several decades. Several recent high profile events have highlighted the risks associated with storage and disposal of coal ash. When coal is combusted, coal ash is produced either as a fly ash (what is captured in pollution control devices within the stacks) or as a bottom ash (the residual, removed from the bottom of the furnace). Coal ash contains trace amounts of many potentially toxic constituents, most notably metals such as mercury, arsenic, and selenium, and low levels of radioactivity. In addition to control of stack air emissions of particulates and other priority pollutants, management of other discharges and wastes is required for operation of all coal-fired power plants, necessitating initial reviews of possible risks to human health and the environment during the permitting process, continued environmental monitoring during operation, and preparation for emergency response and remedial action following accidental spills.

The quantity and relative amounts of toxics in coal ash vary, depending upon the source of the coal and the specific combustion process (temperature, duration, etc.), and fly ash typically has a much different make-up than bottom ash. The ability for toxic materials such as mercury, arsenic, and selenium to leach out of fly ash also is dependent upon the source of the coal and the receiving environment. Risks to people or the environment from mercury, arsenic, and selenium are site-specific. Depending on the characteristics of the ash and the presence of the right environmental conditions, they can biomagnify and pose significant hazards to aquatic life, to wildlife that feed on fish and aquatic invertebrates, or to people who eat local foods. Arsenic can become more mobile in buried ash and leach to groundwater. If not properly managed, handling and storage of ash may result in windblown dusts and inhalation exposure to workers or nearby residents. Therefore, each power plant has its own associated risk potential, and it is difficult to set specific guidelines for risk management at all power plants.

The next issue of Environmental Perspectives will provide a background on how improperly managed coal ash can present a risk to people and the local environment, and discuss the general approach for assessing these risks for coal fired power plants.

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Melissa Kleven, P.E.Managing Engineer—Environmental Sciences Bellevue, Washington

Melissa Kleven has joined Exponent as a Managing Engineer in the Environmental Sciences practice. Ms. Kleven has more than 15 years of experience, and has managed a variety of projects in the Pacific Northwest in the areas of due diligence, environmental permitting, regulatory compliance, site characterization, remediation, closure, and post-closure operation, monitoring, and maintenance. Her areas of expertise include design and implementation of investigations and monitoring programs, risk-based assessment and closure, historical site research, site strategy development, public communications, and litigation support. She has worked on sites impacted with petroleum hydrocarbons, cement kiln dust (CKD), aluminum reduction waste, solvents, metals, and minerals/nutrients. She has provided project management and technical support for projects under RCRA, CERCLA, MTCA, and state programs. Ms. Kleven has supported clients with environmental challenges in many industries, including oil and gas, mining, chemical and materials manufacturing, and research. Litigation support work has focused on groundwater contamination and assisting in the determination of the nature and extent of the impact and the timing of release. Ms. Kleven holds a B.S. in Chemical Engineering from the University of Washington. She is a registered Professional Engineer in both Washington and Oregon.

New Faces Steve Reed, P.G.Principal Scientist—Environmental Sciences Bellevue, Washington

Steve Reed has joined Exponent’s Environmental Sciences practice as a Principal Scientist. Mr. Reed has almost 35 years of experience in the environmental and groundwater resource consulting arena, serving in both technical and senior management roles. He has performed hydrogeologic studies on refineries, power plants, and manufacturing plants throughout the United States. Among other projects, he coordinated a soil and groundwater study to determine the impact from a multi-million gallon fuel spill that was the largest domestic spill at that time. Mr. Reed provides litigation support and expert testimony, as well as regulatory agency negotiations. He has testified in cases before both state and federal courts, before several state agencies, and has been involved in negotiations with numerous state agencies and several EPA regions. As a hydrogeologist, Mr. Reed has managed or participated in projects under RCRA/CERCLA and TSCA. Mr. Reed is a Registered Professional Geologist in Arizona, Mississippi, Missouri, Oregon, Texas, and Washington, and is a Registered Professional Hydrogeologist in Washington. He is also a Certified Professional Geological Scientist with the American Institute of Professional Geologists.

Keri WhetterSenior Associate—Environmental Sciences Bellevue, Washington

Ms. Keri M. Whetter has joined Exponent as a Senior Associate in the Environmental Sciences practice. Ms. Whetter has more than 14 years of experience as an environmental scientist. She has conducted more than 360 Phase I environmental site assessments (ESAs), some of which included limited environmental compliance audits. Phase II projects have included soil and groundwater investigations, geophysical surveys, test pit explorations, groundwater elevation surveys, asbestos surveys, lead-based paint surveys, lead in drinking water surveys, and testing for radon gas. Ms. Whetter conducts site evaluation and research in support of litigation projects. She also supports site investigation and remediation projects for RCRA, CERCLA, MTCA, and other state cleanup programs. Her areas of expertise include data quality review and validation, project health and safety, and regulatory compliance. She holds a B.S. in Chemical Engineering from the University of Washington, and is an EPA-certified Asbestos Building Inspector.

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Publications

Allard P, Fairbrother A, Hope BK, Hull RN, Johnson MS, Kapustka L, Mann G, McDonald B, Sample BE. Recommendations for the development and application of wildlife toxicity reference values. Int Environ Assess Manage 2009, in press.

Bigham G, Law S. Agriculture meets Natural Resource Damage claims. Agricultural Management Committee Newsletter, American Bar Association, August 2009.

Boehm PD, Page DS, Neff JM. Comments on the misuse of SPMDs in recent articles by Springman et al. (2008a, b) and Short et al. (2008). Mar Environ Res 2009; 67:262–267.

Chan WR. National VOC emission standards for aerosol coatings. Metal Finishing 2009, November. http://www.metalfinishing.com/view/5019/national-voc-emission-standards-for-aerosol-coatings/.

Fairbrother A, Fairbrother JR. Are environmental regulations keeping up with innovation? A case study of the nanotechnology industry. Ecotox Environ Saf 2009; 72:1327–1330.

Fairbrother A. Federal environmental legislation in the U.S. for protection of wildlife and regulation of environmental contaminants. Ecotoxicol 2009, in press.

Gunaseelan P, Buehler C, Chan WR. Greenhouse gas emissions: Characterization and management. Hydrocarbon Processing 2009, September; 57–70.

Kane Driscoll SB, Amos BC, McArdle ME, Menzie CA, Coleman A. Predicting sediment toxicity at former manufactured gas plants using equilibrium partitioning benchmarks for PAH mixtures. Soil Sed Contamin 2009; 18(3):307–319.

Lindsay JC, O’Reilly K, Kaetzel R, Roberts M. Limitations of toxicogenomic studies to assess toxic exposures and injury from benzene. Toxic Torts and Environmental Law Committee Newsletter, American Bar Association, Fall 2009.

Menzie CA, Ziccardi LM, Lowney YW, Fairbrother A, Shock SS, Tsuji JS, Hamai D, Proctor D, Henry E, Su SH, Kierski MW, McArdle ME, Yost LJ. Importance of considering the framework principles in risk assessment for metals. Environ Sci Technol 2009, in press.. Epub ahead of print: http://pubs.acs.org/doi/abs/10.1021/es9006405.

O’Reilly K, Kolhatkar R, Buscheck T. Guidance on the remediation of ethanol fuel releases: A conceptual model approach. In: Proc. of 2010 Pacific Northwest Ground Water Exposition, November 2–3, 2009, Costa Mesa, California.

Robrock KR, Coelhan M, Sedlak DL, Alvarez-Cohen L. Aerobic biotransformation of polybrominated diphenyl ethers (PBDEs) by bacterial isolates. Environ Sci Technol 2009, in press.

Solomon KR, Dohmen P, Fairbrother A, Marchand M, McCarty L. Use of (eco) toxicity data as screening criteria for the identification and classification of PBT / POP compounds. Int Environ Assess Manage 2009; 5:680–696.

Yost LJ, Shock SS, Holm SE, Lowney YW, Noggle JJ. Lack of complete exposure pathways for metals in natural and FGD gypsum. Hum Ecol Risk Assess 2009, in press.

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Conferences and Presentations

SETAC North America 30th Annual Meeting November 19–23, 2009 New Orleans, Louisiana

Platform Presentations:

Boehm PD. Analysis of mussels at Exxon Valdez oil spill sites confirm negligible bioavailability of sequestered oil residues.

Boehm PD. Form, chemical composition, and location of remnants of the Exxon Valdez oil spill after 18 years.

Boehm PD. Methodology for determining the equilibrium partitioning of sediment-associated weathered oil residues.

Boehm PD. Problems in using passive samplers in oil spill studies.

Boehm PD. The three-part approach to PAH source identification and apportionment in sediments as applied to petroleum, coal tars, and combustion sources.

Fairbrother A. Framework for ecological risk assessment: How a small guidance document had a huge impact on the way ecological risk assessment is practiced.

Fairbrother A. The art and practice of weighing evidence for environmental assessment.

Menzie C. Begin with a vision on how to integrate assessment, remediation, and NEBA within management goals.

Menzie C. The Massachusetts weight-of-evidence approach: 10 years of experience and utility for informing decisions.

Neff J, Boehm PD. Are wildlife and their prey being exposed to Exxon Valdez spill remnants 18 years after the spill?

Page DS, Boehm PD. Where do remnants of the Exxon Valdez oil spill persist and why?

Poster Presentations:

Durham JA, Boehm PD. Development of a robust quality control program for remote environmental monitoring studies with cyclic siloxanes.

Holm SE, Gross TS, Deardorff TL. Dioxin in fish caught in the lower St. John’s River basin: An evaluation following pulp-and-paper process modifications from 1995–2009.

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Including Landfills• Oil Spill Assessment• Product Stewardship• Site Investigation & Remediation Consulting• Surface Water Contaminant Transport

• Technical Support Services to Financial Transactions

For more information on other Exponent capabilities, please visit our website, www.exponent.com.

To learn more about Exponent’s Ecological, and Environmental capabilities listed below, click here.

Ecological & Biological Sciences• Aquatic & Terrestrial Biology• Bioavailability & Exposure Assessment• Contaminated Sediments Assessment & Management• Ecological & Environmental Risk Assessment• Eco-Sustainability & Ecological Services Assessment• Endangered Species• Environmental Assessment of Technologies & Products• Environmental Modeling & Risk Assessment• Geospatial & Landscape Analysis• Natural Resource Damage Assessment• Oil Spill Assessment• Product Stewardship

• Wetlands Assessment & Construction

Contact: Paul D. Boehm, Ph.D.Principal Scientist and Group Vice President, Environmental Group (978) 461– 4601 [email protected]

About ExponentExponent is a leading engineering and scientific consulting firm dedicated to providing solutions to complex problems.

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CreditsContributing writers: Mark Johns, Ph.D.; Anne Fairbrother, D.V.M., Ph. D.; Gary Bigham, L.G.; Jaana Pietari, Ph.D.; Joyce Tsuji, Ph.D., DABT Editor: Patti WardenDesign/Layout: Betty Dowd

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