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EHS Due Diligence AssessmentsAdding Value, Managing RiskEHS Due Diligence AssessmentsAdding Value, Managing Risk

Taipei, TaiwanAgora Hotel

Taipei, TaiwanAgora Hotel

Mark ErringtonMark ErringtonAsia Pacific Practice Leader M&A Due Asia Pacific Practice Leader M&A Due Diligence Advisory Services ERM GroupDiligence Advisory Services ERM Group20 September 200620 September 2006

2006 Business Integration Forum 2

International PerspectiveERM Forums - October 2005 - June 2006

October 2005Seville, SpainOctober 2005Seville, SpainApril 2006

Scottsdale, Arizona

April 2006Scottsdale,

ArizonaJune 2006Shanghai,

China

June 2006Shanghai,

China


Context: Similar to peers from AP, different to peers in North America/Europe Business climate a year from now

-40%

-20%

0%

20%

40%

60%

80%

100%

CompanySales

YourBudget

YourStaffing

CompanySales

YourBudget

YourStaffing

Column 5up a lotup a littledown a lotdown a little

Beijing 2005 Phoenix 2006


“Significant challenges and changes in your company in the next three years”

1. Increased pressure to apply common EHS standards to all operations globally

2. Increased pressure on companies to be held responsible for supplier behavior

3. Regulatory change and inconsistent enforcement of regulations in Asia4. Increases risks associated with global low-cost strategy5. Dealing with plant safety issues6. Being responsible for more and working with less resources


National Gov’tRegulators

Purchasing

Localcommunities

Local Gov’tRegulators

Board/CEO

Suppliersin Asia

Joint venturepartners

Linemanagement

Humanresources

Customersin Asia

Customersoutside Asia

NGOs

Other Local Gov’t Officials

Finance

GlobalEHS

Legal

Commercial Focus

Civil Society Focus Government Focus

Corporate/Financial Focus

EHS Team


In summary

• Many issues to manage

• Budgets are getting cut back, staffing is decreasing

• Constantly evolving EHS regulatory environment

• High public profile of EHS issues – Inconvenient Truth

• Litigious culture – EHS is class action territory - Erin Brockovitch

• This is very risky stuff

• EDD sit along side all other types of Risk Management Due Diligence you would do on a transaction (Financial, Commercial, IP, IT, Human Capital)

• EHS liabilities touch all parts of a company


The Business Case for EHS Due Diligence



• Just Closing the Deal Doesn’t guarantee success

• 60% of merged companies fail to meet expectations and provide lower than average shareholder returns

• Executives are left figuring out how to mitigate the liabilities



• ProfileHigh profile (CEO to the supermarket)Corporate EHS functions under pressurePublic relations – NGOs, media, even Hollywood, class actions

• Financial Risk ManagementProper valuation of the assetAdequate reserves for contingent liabilities (FRS12, Fin 47)Appropriate representations, warranties, indemnitiesEstablish baseline conditions at entrance to ownership/leaseSatisfy a lending syndicates risk thresholdsManaging post merger costs

• Business ContinuityCompliance assurance – Fines, prosecutions, legal actionsProduction assurance – Shut down costsAchieving the optimum value from indemnities

• Exit Strategies – Vendor DDRealising value from redundant real estate assetsCreating a low liability business:

» to maximise value of non-core asset sales and ensure a clean exit » or for further capital raising


Deal Stage OngoingOperations

Post M&AIntegration

Activity

Integrating EH&S Issues into Business Planning and Performance

Pre-M&APlanning

Benefit

M&AAssessments

Risk Management

Operating Efficiency

Risk Management

Operating Efficiency

Further improvements in efficiency & management of long term

risk

Using M&A assessment to plan, prioritise, integrate EHS systems and develop strategy

Using M&A assessment to plan, prioritise, integrate EHS systems and develop strategy

Understanding and quantifying EHS risks during due diligence

Understanding and quantifying EHS risks during due diligence

Identifying internal and external stakeholder needs, linking EHS & business goals

Identifying internal and external stakeholder needs, linking EHS & business goals

Ensuring compliance

Managing riskContinuous

improvement

Focused transaction

management system

Early warning alarm and

negotiating tool


Risks you need to look for


Traditional EHS Risk Issues• Site History – contaminating industries, previous reports

• EHS prosecutions - accidents, pollution incidents, regulator interviews

• Site Setting – Neighbours, sensitivity and vulnerability (geology and hydrogeology)

• Housekeeping• Processes and Material Use• Chemical Use and Storage• Aboveground storage tanks and belowground storage tanks • Contaminated Land – soil and groundwater, spills

• Solid and Liquid Waste - duty of care

• Waste Water – WWTP discharges, storm water run off, septic tanks, dry drains

• Air quality - dust, noise

• Utilities - Water supply wells

• Hazardous materials - asbestos-containing materials (ACM), PCBs, lead, radon, radiation, sources

• Biological contaminants – mould, e coli, cryptosporidium, anthrax

• Healthy and Safety - injury and illness logs, worker exposure

• Legal – third party claims, worker claims, property blight


Non-Traditional Financial Risk Issues

• EnvironmentalGreenhouse gas emissionsCarbon tradingWEEEROHSDeferred maintenance & trainingCompliance

• Social/EthicalEnvironmental justiceWorking conditionsDisplacementChild laborWorker health & safetyEquitable wages


Some Sources, Pathways, Receptors

SurfaceSource

Leaching/Percolation

Groundwater Transport GroundwaterMigration

Inhalation ofIndoor Vapors

Ingestion,Absorption, &InhalationfromSurficial Soils

Inhalation ofAmbientVapors &

Particulates

SubsurfaceSource Vapor Intrusion

IngestionofPotable Water

FishLarvae Shellfish

Fish

Buried waste


How to determine the problems


EHS Assessment - Interactions

EHS Due EHS Due DiligenceDiligence

FinancialFinancial•• Contingent liabilitiesContingent liabilities•• Valuation inputsValuation inputs•• Cash flow sensitivity analysisCash flow sensitivity analysis•• Indemnification valuesIndemnification values•• Performance assurancePerformance assurance EH&SEH&S

•• Facility statusFacility status•• Liability validationLiability validation•• Forecasted budgetsForecasted budgets•• BenchmarkingBenchmarking•• Voluntary corporate Voluntary corporate

commitmentcommitment•• Program risksProgram risks•• Corrective actions plansCorrective actions plans•• Performance planningPerformance planning--actionsactions•• EH&S IntegrationEH&S Integration

LegalLegal•• Historical indemnityHistorical indemnity•• Deal indemnity termsDeal indemnity terms•• Corporate risk Corporate risk •• Insurance recoveryInsurance recovery

Executive Management/BoardExecutive Management/Board•• Strategic compatibilityStrategic compatibility•• Strategic risksStrategic risks•• Catastrophic riskCatastrophic risk

Plant ManagementPlant Management•• Operational constraintsOperational constraints•• Corrective actionsCorrective actions•• Performance assurancePerformance assurance


Levels of Assessment (Phased)

IntelligenceIntelligenceGatheringGathering

•• DatabaseDatabase•• Environmental Environmental

ReportsReports•• Aerial PhotosAerial Photos•• Agency File Agency File

ReviewsReviews•• Covert DriveCovert Drive--bysbys

and Inspectionand Inspection

Due DiligenceDue DiligenceScreeningScreening

•• Focused Focused questionnairesquestionnaires

•• Telephone Telephone InterviewsInterviews

•• File Room File Room ReviewsReviews

FullFullDue DiligenceDue Diligence

Site VisitsSite Visits•• ComplianceCompliance•• Operational Operational

CapacityCapacity

Level of EffortLevel of Effort

Info

rmat

ion

Qua

lity

Info

rmat

ion

Qua

lity

and

and

Ris

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anag

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isk

Man

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Get you advisors involved early

• Before: We are being called upon long before due diligence begins:Strategy for Vendor Due DiligenceInitial stages of planning acquisition approach (esp VCs)

• During: We sit along side the other key advisors at the centre of dealsData room review & costing of potential liabilities at 1st and 2nd roundInitial Site Visits (esp for Financial sector)Full Phase 1 covering E, OHS, Process Safety, Business Integration.Technical input to Sale & Purchase Agreements at each auction round

• After: We continue to work with parties long after deal is completePreparation of Exit StrategiesFollow claims according to SPAConduct vendor due diligence for exit (completing the life cycle)



• Phase IBackground data reviewData roomQuestionnaireSite visit – walkover, audit, staff interviews

• Detail determined byMateriality is the method used to reduce the level of detail on a project

» Based on size of transaction and risk threshold of the client» Does not exclude pertinent observations, simply defines which findings are to

be included in reportingLimited Compliance – limited to material issues, based on our judgments regarding potential capital costs or penaltiesManufacturing portfolio – US$50k – process complianceGas station portfolio - US$100k – S&GWPower station portfolio – US$1m - S&GW, WWTP, Air, permittingRefinery portfolio – US$1m+ (plus aggregates) - S&GW, WWTP, Air, permitting



• Phase 2 – More detailAssessment soil and groundwater contamination (Sampling)

• Phase 3 – RemediationClean upPermittingEHS Management system


When you know what the problems are how do you get the solution?


To get the most value, you need:

Business application of the technical information.

Formulation of results in a format suitable for assimilation by management and financial teams

Support for those teams throughout the negotiation process.

Support during the agreement process – SPA, indemnity clauses, following up claims


Quantification of liabilities

• Site management budgets (approved or not)

• In business capex (liaison with financial advisors)

• Existing Compliance, Good MP, Future Compliance

• Cost Scenarios: Best case, Worst case, Most likelyMost LikelyReasonable Worst Case


Quantification of liabilities

• What the issues are • Cost – (degree of confidence - low range if enough detail)

• Timescale for expenditure and probability • Possibility of it ever being realised

Regulators degree of toleranceSensitivity, vulnerability of environment (H/M/L)

In Summary – What, why, how much, when and likelihood of spending event. For complex multi-site deals this is important


Cost-Risk Analysis to prioritize corrective actions -Agreeing the financial solution with the vendor or post acquisition action planning

A

B

C

D

UST

$4M

$3M

$2M

$1M

Remediation Air Wastewater Asbestos

CostCost(front)(front)RiskRisk

(rear)(rear)


Cash Flow Projections for Projected Remedial Spending

(Cash Flows In U.S. Dollars)Year 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

"n" 0 1 2 3 4 5 6 7 8 9 10 11Undiscounted Discounted

Components Cash Flow Cash FlowAssessment $30,000.00 30,000 30,000Investigation $67,961.17 63,063 70,000Risk Assessment $38,834.95 36,036 40,000Feasibility Study $48,543.69 45,045 50,000Agency Negotiation $19,228.96 17,206 10,000 10,100Permitting $19,417.48 18,018 20,000Remedial Design $58,252.43 54,054 60,000GW Treatment System (capital) $384,107.83 346,969 250,000 150,000GW Monitoring (15 years)* $71,280.20 53,216 10,000 10,500 11,000 11,500 12,000 12,500 13,000GW Treatment System O&M (X yea $277,397.67 216,175 50,000 50,500 51,000 51,500 52,000 52,500Replacement costs during Operation $48,543.69 45,045 50,000Agency Cost Recovery $43,689.32 40,541 45,000Dismantling Costs/Site Restoration $97,087.38 90,090 100,000Miscellaneous (describe in notes) $49,757.28 47,973 25,000 25,500

Total 1,254,102 1,103,431Notes:

All cash flows are represented in inflation adjusted terms using 3% inflation rateUndiscounted cash flow column it a total of all cash flows discounted at the 3% inflation rateDiscounted cash flow column it a total of all cash flows discounted at the 11% Cost of CapitalDiscounting begins with 1999 as year 1. 1998 costs are undiscounted.


Reserve Assessment: PRA Monte Carlo AnalysisReserve Assessment: PRA Monte Carlo Analysis

Cumulative Distribution Increases the Likelihood that Remedial Costs Will Not Exceed a Given Amount


Negotiations and Agreements


Negotiations and Agreements

• SPA – indemnity clauses

• Escrow accounts

• Insurance - financial solutions to get liabilities off balance sheets and prevent deal stoppers

• Assigning reliance


Timing for Assessments


Costs of typical liabilities

Costs to determine them


Thank You

Download - EHS Due Diligence Assessments Adding Value, Managing Riskbcsd.org.tw/2010/images/doc/701/20060920/950920_03.pdf · Adding Value, Managing Risk EHS Due Diligence Assessments Adding

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