EME Solutions Environment, Management & Engineering Optimizing the Environmental Due Diligence Process Angela Libby Jankousky (303) , For Executive Enterprises October 20, 2000

2 Presentation Goals  Why do environmental due diligence?  Historical evolution  Standard (ASTM) process  Enterprise-wide due diligence  Framework for optimizing

3 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 $$$

4 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

5 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

6 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

7 Only 3 Defenses  Act of war  Act of God  Innocent Land Owner Defense (‘86) Purchaser did not know and had no reason to know about the contamination Catch 22

8 The Big Bang Include current sites, former sites, disposal sites.

9 A Cautionary Tale

10 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

11 For Continuing Operations Guilty: Knowing Violation Guilty: Should Have Known

12 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 prosecution See Effective 5/11/00www.epa.gov/oeca/ore/apolguid.html

13 Compliance Audit Strategy  Noncompliance(s) not discovered: But suspected  Incorporate into corporate audit system May have more than 21 days to report

14 States w/ Audit Privilege and Immunity Laws (6/1/00) Colorado South Dakota Kentucky South Carolina Minnesota New Hampshire Wyoming Ohio Utah Montana Texas Alaska Kansas Nevada Virginia Nebraska Michigan Iowa Arizona Idaho Source: Katheryn Jarvis Coggon, Holme Roberts & Owen, LLP

15 Environment, Health & Safety  Innocent land owner defense  Environmental baseline  Civil and criminal liability  Tap remediation funds  Impact of upcoming regulations  Understand product liability

16 Impact of Upcoming Regulations  Material costs should be disclosed  Examples of potentially high cost issues Air Toxics regulations Montreal Protocol requirements (CFCs) Ergonomics Issues

17 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

18 Product Liability Issues  Recent bankruptcies Dow Corning (silicone breast implants) Owens Corning (asbestos)  Future Issues ??

19 Presentation Goals  Why do environmental due diligence?  Historical evolution  Standard (ASTM) process  Enterprise-wide due diligence  Framework for optimizing

20 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.)

21 What happens if we buy the contaminated property? “It would be baaaaad!!”

22 Post-CERCLA Evolution  Chaos  The beginnings of standardization  ASTM standards (1993)  Today Check off the environmental box Tailor process to the transaction

23 Due Diligence Costs, Timing $1.5K - $7K/site $10K- $$$!/site One month At least one more month

24 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

25 Presentation Goals  Why do environmental due diligence?  Historical evolution  Standard (ASTM) process  Enterprise-wide due diligence  Framework for optimizing

26 Std Practice for Environmental Site Assessments: Phase I “To define good commercial and customary practice for conducting an environmental site assessment” ASTM E

27 ASTM E  Intent: innocent landowner defense  Not designed to assess business environmental risk

28 Phase I Environmental Site Assessment  Records Review  Site Reconnaissance  Interviews  Report

29 Records Review  Standard Environmental Record Sources  Additional Environmental Record Sources  Physical Setting Sources  Historical Use Information

30 Standard Environmental Records Federal NPL site listFederal CERCLIS list CERCLIS NFRAP listRCRA facilities list RCRA generators listRCRA TSD facilities list Federal ERNS listState NPL list State CERCLISState registered USTs State Leaking UST listsState landfill & solid waste disposal lists

31 Local Environmental Records Data lists Brownfield sites Data sources Dept. of Health/Environ. Lists of landfill sites Lists of haz waste sites Records of wells UST lists Local land records Records of Emergency release reports Fire Dept. Planning Dept Local/Regional Agencies Local Electric Companies Building Inspection /Permit Dept (not exhaustive)

32 Physical Setting Sources  Required USGS 7.5 Minute Quad Map  Discretionary Groundwater maps Bedrock geology maps Soil maps Others

33 Historical Use Information  Develop a history of the property All obvious uses of the property from present 1940 or First use Whichever is earlier

34 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.

35 Phase I Environmental Site Assessment  Records Review  Site Reconnaissance  Interviews  Report

36 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

37 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

38 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

39 Phase I Environmental Site Assessment  Records Review  Site Reconnaissance  Interviews  Report

40 Those who may be interviewed  Key site manager  Site Occupants  Environmental or safety professionals Site Corporate  Those with info re: previous practices

41 Interviewee Balancing Act Desire to be: Truthful Helpful Loyal to pro- spective emp. Desire to be: Loyal to employer Protective of past mistakes

42 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)

43 Interviews w/ Gov’t Officials  To obtain information indicating recognized environmental conditions  Local Agencies to be Interviewed Fire Department Hazardous Waste Disposal Health Agency

44 Phase I Environmental Site Assessment  Records Review  Site Reconnaissance  Interviews  Report

45 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

46 ASTM Phase I “Non-scope” Considerations AsbestosHealth and Safety RadonEcological resources Lead-Based PaintEndangered Species Lead in Drinking WaterIndoor air quality Wetlands Regulatory Compliance Cultural resources Historic resources Industrial HygieneHigh voltage power lines

47 Post ASTM Phase I  Get a rough estimate of liabilities Consultant’s understandable reluctance  Huge error bars around these estimates

48 Lesser Liability Range Potential Typical Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.

49 More Costly Potential Liabilities Potential Typical Source: Wayne Tusa, Environmental Risk and Loss Control, Inc.

50 Overlapping Interests Envir. Consult. Comfortable w/ASTM Reluctant to estimate costs Would like to do a Phase II Wants repeat business Buyer’s Mgt Wants answer Tolerates uncertainty, depending on the structure of the deal Generate Costs With error bars & probabilities

51 Is Phase II Necessary? No sig. liabilities Can be managed contractually? Phase I Maybe. Need more data No. Deal killers Phase II Yes. Potentially significant liabilities Develop a Strategy for each issue

52 Presentation Goals  Why do environmental due diligence?  Historical evolution  Standard (ASTM) process  Enterprise-wide due diligence  Framework for optimizing

53 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 Materiality Threshold Different Interpretations

54 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

55 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

56 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

57 Presentation Goals  Why do environmental due diligence?  Historical evolution  Standard (ASTM) process  Enterprise-wide due diligence  Framework for optimizing

58 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

59 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

60 Trade Offs Increased Risk Sketchy Information Inflated Purchase Price Request Indemnities Higher Cost Better Information Accurate Purchase Price Minimal Due Diligence Extensive Due Diligence

61 The Optimal Due Diligence  Fits the transaction  Evolves with the transaction And may change the transaction  Post acquisition integration