This document discusses the need for environmental counterparty tracking to monitor the financial risk of companies that are potentially responsible parties (PRPs) for environmental cleanups. It outlines principles for a tracking process using credit scores and financial reports to evaluate PRPs. The process would use Dun & Bradstreet scores initially, and if a PRP fails that test, would review financial reports and use additional models. Tracking counterparty risk can help allocate cleanup costs appropriately and obtain financial assurance from riskier parties. It reduces risks to PRPs from companies that may default on cleanup obligations.

1. CONFIDENTIAL
Environmental Counterparty Tracking
p y g
Contact:
John Rosengard
(415) 982-3100
www.erci.com
© 2012 Environmental Risk Communications, Inc.

2. Outline
 Need for Environmental Counterparty Tracking
 Principles for an Environmental Counterparty Tracking Process
 Process Overview
 Business Case / Value Proposition Analysis
 Deployment Process
 Path Forward
© 2012 Environmental Risk Communications, Inc. 2

3. Need for Environmental Counterparty Tracking
 Environmental cleanups are Normal Default: 1.4%/year
long-term
 5 to 15 years in design and Randomized for
remediation phases
p Allocation
 30+ years in O&M
 Financial risk sets in over time:
bankruptcies will remove 1.4% /
annually of the PRP allocation
from a given group each year
 In a large group, after 30 years,
only 65.5% will remain (see
graphic)
hi )
Randomized for Allocation
 Calculating counterparty risk is and Credit Rating
required under FASB 157(f), now
in GAAP as “ASC 410-30-25-12
ASC 410 30 25 12
Uncertainties Related to the
Allocation of Estimate“
3
© 2012 Environmental Risk Communications, Inc.

4. Counterparty 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
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
other potentially responsible parties or th government.
th t ti ll ibl ti the t
© 2012 Environmental Risk Communications, Inc. 4

5. Principles 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. 5

6. Process Overview
Primary Test: Secondary Tertiary Test:
D & B Scores Test: 10K Data EPA ABEL
Review Model Negotiate Cash
• Request & Out Settlement
evaluate financial
reports from
Evaluate and companies that Evaluate the PRP’s
report on two failed Primary financial condition F
specific Dun & Test
Bradstreet scores,
, Fail Fail using EPA’s ABEL A
• Review financial Model
M d l (40 CFR I
compare to agreed L
data for available 264.151)
metrics
cash and cash
flow from Provide alternative
continuing form of Financial
p
operations,, Assurance [e.g.,
Fail parent guaranty,
potential trends,
and/or parent letter of credit,
ownership insurance]
P P P P
A A A A
S S S S
S S S S
Company Meets Environmental Counterparty
Tracking Requirements
© 2012 Environmental Risk Communications, Inc. 6

7. Business 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
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. 7

8. Value Proposition to the PRP Group:
o Ten member PRP Group p
o Each PRP has 10% allocation
o $1 million in future cash calls
o Random range of credit ratings
No Action By
B Common Co nsel
Counsel ERCI
Common Counsel $0 $16,000 $0
40 hours/quarter, $100/hr
Dun & Bradstreet (DNBi)
( ) $
$0 $ ,
$6,000 $
$0
Costs 10 DNBi Reports/quarter,
$150 per report
ERCI $0 $0 $15,000
$1,500 per PRP,
monthly DNBi
PRP Group Costs Due to $0 to $100,000 $0* $0*
ECT Failure
Recoveries in Chapter 11 ($50,000
($50 000 to $0) $0* $0*
Total $0 to $100,000 $22,000 $15,000
* Assumes DNBi Report review prevents all defaults
© 2012 Environmental Risk Communications, Inc. 8

9. Deployment Process
 Engage PRP group, modify PRP agreement
 Develop / refine a site’s “future cost model”
 Q
QC for comprehensiveness, standard use of inflation, and discount rates
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
 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
poorly-rated or consolidated entity with no financial statements (complete guarantees)
 Test each entity
 Complete Primary Secondary, and Tertiary Criteria Tests
Primary, Secondary
 Report to the PRP Group and bring failing PRPs to workout stage
 Complete reviews every quarter
© 2012 Environmental Risk Communications, Inc. 9

10. Path 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 language
g 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
One time analysis, affidavits,
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