environmental due diligence strategy for petroleum marketing transactions

Environmental Due Diligence Strategyfor Petroleum Marketing TransactionsSIGMA Maintenance, Environmental & Safety Share GroupSeptember 2017Dallas, Texas

INTEGRATIONEXECUTIONPLANNING

• Warm-up• Pre-Planning Considerations• Execution • Integration

AgendaEnvironmental Due Diligence Strategy for Petroleum Marketing Transactions

1Antea USA, Inc.

Who has been involved in an environmental due diligence project?

What has changed over time?

Warm-upEnvironmental Due Diligence Strategy for Petroleum Marketing Transactions

2Antea USA, Inc.

Presenter

Presentation Notes

Buyer versus Seller? How many have heard the phrases “As is/Where is” sale, or “no poking holes in the ground” Consider the types of Buyers and competitive environment

Pre-Planning Considerations

3Antea USA, Inc.

Environmental Due Diligence Strategy for Petroleum Marketing Transactions

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Presentation Notes

As the EH&S Manager assigned to the deal team: Up to you to know which types of liabilities are relevant to the deal Failure to review/assess liabilities creates risk, OR Investing in reviewing liabilities that are not relevant adds costs Ask Questions!

• Investment thesis, goals, and target identification• Stakeholders• Sales Process• Assets Involved• Transaction type• Liability Types and accountability

Pre-planning considerationsUnderstanding the Deal

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Presentation Notes

Talk about a number of aspects to consider as the planning process takes place

DivestitureInvestment

ThesisDue

Diligence

Transaction Life Cycle

Value Building

Cost Reduction

Risk Reduction

Business GoalsInvestment Thesis

• Targets Identified

• Targets pursued

• Investment thesis developed

STRATEGIC BUYERS

PRIVATE EQUITY, VENTURE CAPITAL, INVESTORS

Efficiencies

Capital Raising

• LPs/Funds• Cash and

assets from operations

Spin offs

Investment Exits

• Business decision to acquire

• Characterize Target

• Unknowns and Uncertainties

• Verify feasibility of investment thesis

$$

$ Post Acquisition Integration and

Operational Performance

Presenter

Presentation Notes

Investment Thesis may include desired assets, size (growth aspirations), geography, brand, offense/defense, etc. Affects the EHS world if the thesis involves acquiring distressed assets, assets outside of the core business, manpower

Stakeholders• Buyer Shareholders• Seller Shareholders• Traditional Lenders• Investors/Partners

• Private Equity• REITs• JVs

• Employees

Due Diligence Process Requirements Determined by:

6Antea USA, Inc.

Pre-planning Considerations

Define Expectations Regarding:• Competitive landscape• Risk Tolerance/Materiality• Communication• Confidentiality• Disclosure & Due Diligence

terms and limitations• Budget• Schedule• ScopeSale process

• Pre-defined buyer• Structured Sale• Auction

Presenter

Presentation Notes

Stakeholders and the type of sale will typically determine the due diligence process requirements Employee confidentiality concerns Under a highly competitive sale, is there a value added component that can enhance the EHS valuation? “As is/Where is” and “no poking holes in the ground” scenarios

Transaction Type• Asset purchase

• Single site or portfolio

• Stock purchase• Re-capitalization• Other variations

• MLP Dropdown• Carve-out• Management Buyout

Scope of Due Diligence ActivitiesPre-planning Considerations

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Assets

Presenter

Presentation Notes

Breadth of Due Diligence determined by the Transaction type and Assets involved – No one size fits all Assets may include hard assets such as dirt only (greenfield/brownfield), UST/AST systems, buildings and other improvements, transport Assets may include soft assets such as people and management systems

Know where to focus

8Antea USA, Inc.

EHS ComplianceSub-surface Impacts

Third Party Claims or Obligations

Structural Abatement


People

EHS Management Systems

CSR/Sustainability

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Presentation Notes

Sub-surface Impacts – Impacts due to current site operations, historic, or adjacent Third Party Claims – associated with subsurface impacts (property damage/NRD) , or injuries Structural Abatement – asbestos, mold, radon, lead based paint EHS Compliance – for transport and storage facilities, obligations related to laws and regulations that apply to transportation, storage, use (operation), disposal, and release of chemical substances and Other activities that adversely affect the environment. Also includes occupational and other applicable safety regulations. EHS Mgmt Systems – Not typically ISO standards but Tank systems, compliance data, safety statistics, training – electronic and other People – Roles and Responsibilities, geography, skillsets CSR/Sustainability – Private equity and foreign investors may require evaluations against international standards (GHG, Water, etc.)

Asset Sale –Dirt Only

• Subsurface Liabilities

• Third Party Claims/Obligations

Asset Sale –Dirt + Improvements

• Subsurface Liabilities• Third Party

Claims/Obligations• EHS Compliance Status• Structural Abatement

Stock Sale

• Subsurface Liabilities• Third Party

Claims/Obligations• EHS Compliance Status• Structural Abatement• EHS Management

Systems• People• CSR/Sustainability

Typical EHS Due Diligence Considerations

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Presenter

Presentation Notes

Dirt Only – Typically sub-surface and related third party liabilities Dirt plus improvements - Typically sub-surface and related third party liabilities; EHS compliance; Structural abatement, ie asbestos, mold, radon, lead based paint Stock Sale - Typically sub-surface and related third party liabilities; EHS compliance; Structural abatement, ie asbestos, mold, radon, lead based paint; management systems and people. Investors may also require that Corporate Social Responsibility/Sustainability issues be addressed.

The EHS transaction team must be capable of addressing each component!


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Presentation Notes

Questions so far?

Due Diligence Execution

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Once the planning process is complete, initiate the due diligence exercise

Collecting InformationDue Diligence Execution

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1) Review of Seller-provided documents2) Review of publicly available info

4) Visual inspection of selected assets5) Visual inspection of all assets

7) Intrusive assessments and testing

3) Use commercial database services

6) Phase I ESA (under ASTM)

* Appendix B contains supplemental detail

• Gather information• Develop a screening tool to tabulate all material findings and liabilities and separate those

that are accruable (can reserve)• Use the level of materiality to focus on relevant liabilities• Identify any deal breakers or risks that are unmanageable – Red Flags• Evaluate how the liabilities would be managed post acquisition• Have a plan to address non-compliance issues• Speak the language of the decision makers

• What are costs?• When and how will they be paid?

Evaluating and Quantifying LiabilitiesDue Diligence Execution

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Presenter

Presentation Notes

Staged sale process, consider a staged due diligence process, limiting the investment until Buyer short-listing occurs (Phase Is?) Create a formal information request checklist to address each focus area – may eventually buy time if necessary Anonymity concerns 1) Seller provided documents – e-data room – even playing field - may be sufficient in a first round bid IF populated completely and timely – can always re-visit and validate in a later round 2) Publicly available information – state databases with release and compliance info – ease of access varies – FOIA may not fit timeline and not anonymous 3) Commercial Dbase Services - EDR, ERS, ERIS – Environmental Incident history, receptors, permits, radius search – May satisfy AAI 4/5) Visual Inspections – Confirm previous findings – housekeeping – may not be allowed 6) Phase I ESAs – Often required by a lender – Ideally performed by Seller – AAI – ASTM e1527-13 or modified – “Potential” for a problem/REC – Nice to Have 7) Intrusive Assessments – Confirms the presence or absence of a problem – Can address sub-surface, structural, or tank system concerns

• Inventory Active Incidents, Incidents with No Further Action status, and retained liabilities, i.e.previously divested properties

• For active incidents, identify extent and magnitude, contaminants of concern, remediation lifecycle stage, remedial action plan, receptor impacts, and existing spend forecasts

• For closed incidents, identify date of closure, circumstances of closure, and applicable restrictive covenants or institutional controls

• Independent cost forecasts can be developed using a single site ground-up forecast, or probabilistic cost modeling can be performed for single sites, or portfolios

• Define cost recovery opportunities from State Funds, insurance policies, and Third Party indemnification agreements. Identify State Fund sunset dates

• Consider total spend and cash flow, and remember – uncertainty results in conservative forecasts

• Further investigation may be required for off-site issues potentially impacting the subject property

• Define future responsibility through contractual indemnifications• OK to have liabilities, as long as they are identified, and sufficiently

characterized for incorporation into the financial deal models

Quantification of Known LiabilitiesDue Diligence Execution

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Pilot Test Portfolio Cash Flow Model (18 Sites)

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

Year1

Year2

Year3

Year4

Year5

Year6

Year7

Year8

Year9

Year10

02468101214161820

Gross SpendNet SpendActive Site Count

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Review everything disclosed by the Seller Have a secondary reviewer to QC the screening process A level of materiality should be agreed on before the liability assessment begins Factors: size of the deal, risk tolerance of the acquiring company, quality of the data to review, and physical limitations (schedule) Many formats are available for developing the list of liabilities, but cost is the universal translator The liability is described, a cost range is developed Costs may be calculated directly from engineering or contractor information, or the range of costs can be developed from computer simulations such a probability modeling What if you spot a compliance issue? Here is where the legal counsel may play an important role by interpreting and developing ways to disclose non-compliance to minimize fines and penalties and protect the seller.

Unknown liabilities may include:

• Pre-existing undiscovered incidents• Regulatory re-openers• Third party property damage/bodily injury claims• Natural Resource Damage claims• Non-owned waste disposal facility issues• Current and previously owned properties

Unknown LiabilitiesDue Diligence Execution

15Antea USA, Inc.

Consider:

• The potential for an issue to exist

• The potential for an issue to be discovered

• Financial exposure

• Risk mitigation strategies such as pollution liability insurance

Presenter

Presentation Notes

Closed incidents often include leaving contaminants in place under risk based closures. Beware of IC/RCs and soil mgmt. requirements to protect worker exposure

EHS ComplianceDue Diligence Execution

16Antea USA, Inc.

Primary focus on tank systems: • Obtain accurate facility specific tank system component inventories including

installation dates, tank/line types, monitoring technologies, etc.• Obtain recent integrity testing data (1-3 years)• Optionally perform additional integrity testing, i.e. tank and line tightness testing• Identify recent NOVs through Seller records or on-line State databases, and confirm that

issues have been addressed• Be aware of current and pending deadlines for equipment upgrades• Define capital expenditures necessary to maintain future compliance• Define actions necessary to address open NOVs – Seller responsibility?

Also consider: • Multi-media permit status for Tank Farms or other operation types, i.e. Air, SPCC, SWPP,

Waste, etc.• DOT compliance for trucking fleets• OSHA compliance for worker safety• Storage Tank Operator Training compliance

Presenter

Presentation Notes

We previously looked at active and closed incidents, but what about properties with no incident history? Potential to exist based on operation history (including duration), and history of activities that could have discovered a release Potential for discovery based on future activities, i.e. tank system replacement NFA sites could have more recent incidents depending on how long ago the NFA was received

• Includes mold, lead based paint, radon, and asbestos• Often not considered high risk or material, and evaluations are usually

not included in a standard Phase I ESA • Exposure typically excluded from insurance policies• Abatement costs can be estimated based on conclusive findings

Structural Abatement Related LiabilitiesDue Diligence Execution

17Antea USA, Inc.

Presenter

Presentation Notes

Obtain existing data Perform integrity testing ID open NOVs Poor housekeeping should be noted Start thinking about necessary transition activities

Management Systems• Status of implementation• Maintenance effort required• Effectiveness• Cost• Integration potential• Redundancy

People• Roles & Responsibilities• Skill & Knowledge• Geography• Redundancy

Management Systems & PeopleDue Diligence Execution

18Antea USA, Inc.

Presenter

Presentation Notes

Confirmation testing must be specified Once it is known what is there, costs can be estimated or a bid process conducted

Transition & Integration

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• The Goal of Integration1) Ensure a seamless transition of operational compliance 2) Align the newly acquired EHS organization to the existing organization andculture while maintaining the necessary EHS programs

• Every transaction presents unique situations – the integration strategy must be flexible

• Integration is bigger than EHS team• Plan the transition well before closing

The Importance of Integration (for EH&S)Transition & Integration

20Antea USA, Inc.

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• The due diligence process may identify known and previously unknown liabilities or non-compliance:

• Define how identified liabilities will be handled through contractual indemnification agreements

• Determine what may require agency disclosure and by whom• Plan for the transfer of permits, licenses, financial assurance

mechanisms, etc.• Management System functional assessments• Interviews with Key staff - assess culture and capabilities to

implement new policies and procedures post acquisition• Identify important organization and procedural issues for

further review

Preparing for IntegrationTransition & Integration

21Antea USA, Inc.

Presenter

Presentation Notes

Be flexible, ask for help, and plan ahead Integration issues transcend the issues that EH&S managers face. There will be issues on staffing, business unit organization, roles and responsibilities, and many other items that will be addressed by corporate management or other departments. Our focus should be on items that we can address with the acquiring company’s EHS team. It is up to the acquiring company’s EHS operations management to make sure the new organization functions together. The acquisition team is usually specialized to complete the transaction, operational folk have to make it work. Consultant's role: A consultant can play a significant role by recording and observing the target company EHS team during the due diligence assessment, and collect information that can be helpful in planning.

• Develop a corrective action plan (e.g., 100-day plan)• Assign responsibilities• Develop schedule for completion

• Standard Operating Procedure updates• Management system integration• Training – Assess and implement EHS training requirements for new

standards, culture, and company policies (risk reduction)

Post-transaction prioritiesTransition & Integration

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Perspectives and fine printEnvironmental Due Diligence Strategy for Petroleum Marketing Transactions

23Antea USA, Inc.

The contents of this presentation are for informational and educational purposes and not intended to be construed as professional advice.

Presenter

Presentation Notes

The due diligence assessment process may identify previously unknown liabilities (non-compliance and contamination) known only to the acquiring EHS Team Develop a corrective action plan assign responsibilities Develop schedule for completion Determine non-compliance items that need to be disclosed to the agency Use due diligence assessment to claim the audit privilege (EPA has time limit) This part of the integration is likely best in close consultation with legal counsel The seller may be at risk in some situations where there is an obligation to report a non-compliance issue or a release.

Question or Comments?Environmental Due Diligence Strategy for Petroleum Marketing Transactions

24Antea USA, Inc.

Bill MacDonaldOil & Gas Segment LeaderAntea [email protected]

Presenter

Presentation Notes

Disclaimer Presentation is Antea Group’s “opinion” only, not legal advice. Materials will be made available Every project/client/situation is different - this does not represent Antea Group’s only approach This is EH&S related only

B E T T E R B U S I N E S S , B E T T E R W O R L D℠

Antea Group Offices

USA Headquarters5910 Rice Creek Parkway, Suite 100St. Paul, MN 55126, USAUSA Toll Free: +1 800 477 7411 International: +1 651 639 9443

BelgiumRoderveldlaan 12600 Antwerpen

ColombiaCalle 35 No. 7-25, Piso 12Bogota, DC

France29 avenue Aristide Briand - CS 1000694117 Arcueil Cedex

NetherlandsMonitorweg 291322 BK Almere

www.anteagroup.com

Long Beach, CA Atlanta, GA St. Louis, MO Portland, OR

Oakland, CA Chicago, IL Bridgewater, NJ Philadelphia, PA

Sacramento, CA Bettendorf, IA Moorestown, NJ Pittsburgh, PA

San Jose, CA Des Moines, IA Syracuse, NY Austin, TX

Denver (Lakewood), CO Baltimore, MD Valhalla, NY Park City, UT

Loveland, CO Boston, MA Charlotte, NC Seattle, WA

Harford, CT Detroit, MI Columbus, OH

Jacksonville, FL St. Paul, MN

Appendix A


26Antea USA, Inc.

• Desktop reviews to screen the targets for known issues– data room reviews, review of commercially available databases, and review of publicly available information from regulators, agencies, or otherwise;

• Site visits to review the site operations, conditions, infrastructure, interview personnel, and assess the potential for neighboring or regional issues;

• Interviews with facility-level personnel as well as interviews with the c-suite team to ferret out less tangible issues, geared around specific topics (culture, management systems, organization, pending litigation, formerly owned properties, etc.).

• Phase I/II Environmental Site Assessments (ESA) – more formal processes used to identify and/or characterize potential subsurface contamination risks (i.e., soil, groundwater, soil vapor);

• Material compliance reviews (MCR) formal reviews of site conditions and operations to identify compliance risks that are material to the deal, associated with applicable environmental, health, and safety regulations;

• Benchmarking/ screening tools include product stewardship assessments, assessment of water resourcing risks, energy efficiency evaluations, sustainability programs (benchmarking), GHG/Climate Change screening assessments;

• Financial reviews evaluate reserves, operational budgets, and planned CAPEX for indications of known liabilities and/or discrepancies with expected expenditures.

• Social and cultural risk evaluations to serve the needs of global financing institutions as well as corporate requirements for ESG standards, following IFC performance standards as well as EBRD performance requirements.

• Integration risk assessments analyze due diligence with foresight to understand EHS challenges from a post-acquisition integration standpoint (merging management, systems, policies, procedures, and cultures).

• Liability identification, quantification, and risk transfer services identify and understand EHS downside risks, evaluate triggers, assess the likelihood of realizing the risks. Then we develop plans for managing the risks post-acquisition, and offer tools and solutions for mitigating exposures.

• Cost modeling and probabilistic liability quantification for situations involving significant uncertainties and unknowns forecasted as part of the risk analysis. Probabilistic modeling can provide a reasonable approach to risk quantification such that the risks can be incorporated into financial models at the deal table.

ANTEA GROUP TRANSACTION SUPPORT SERVICES:Environmental Due Diligence Strategy for Petroleum Marketing Transactions

27Antea USA, Inc.

http://us.anteagroup.com/en-us/services/environmental-liability-management/phase-1-and-phase-2-environmental-site-assessments

http://us.anteagroup.com/en-us/services/operational-performance-and-assurance/environmental-audits-and-assessments

Appendix B


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• Typically in an electronic data room• May require the buyer to acknowledge that it has reviewed and

accepted the seller’s information as complete disclosure• Important that the buyer review all information provided by the seller• May be sufficient for Stage 1 bids

Seller Provided DocumentationDue Diligence Execution

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PROS• Often available on-line• Inexpensive, fast, potential to identify wide range of

property and corporate liabilities• Can effectively communicate large amounts of data• All parties have access to the same information

CONS• Often not available until too late• Information controlled by Seller• Difficult to verify and to glean relevant data• Seller may limit ability to copy or download• Seller can restrict time allowed for review in

competitive bidding and auctions

• Obtained anonymously or through information requests (FOIA)• If public-held company, utilize annual reports and SEC filings• Regulatory Agency Databases and files through on-line access points or

FOIA requests; Keyword and topical searches on-line; Local Government archives for historical and building information

Publicly available informationDue Diligence Execution

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PROS• Inexpensive if on-line or electronic means utilized• Can be performed anonymously• Buyer can control information sources

CONS

• Need key location information for each asset• Information is often incomplete or dated• State by state inconsistency in what is available• FOIA process may require an unacceptable timeline• Proprietary data will not show in searches • Cannot be anonymous if using FOIA request• Some files must be viewed in-person

• Provide environmental incident and other types of information filtered by geographic coordinates (i.e. radius reports)

• Examples: EDR, ERS, ERIS

Commercial database servicesDue Diligence Execution

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PROS• Can help satisfy requirements for AAI• Maintains anonymity• Search criteria widely accepted, repeatable,

recognized, and consistent• Ability to geocode the information saves

considerable search time• Some unique and proprietary databases are

available

CONS• Exact location information is needed• Geocoding can be unreliable• Can contain irrelevant and repetitive data

• Visual inspection of selected representative assets • Visual inspection of all assets • Often performed in conjunction with historical reviews and databases• Adds confidence to database searches

Visual InspectionsDue Diligence Execution

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PROS• Most effective way to observe and confirm

site information and operations• Fills an important requirement to meet the

standards for all appropriate inquiry

CONS• Time consuming and expensive for teams to

reach remote sites• The brief inspection “snapshot” may not give

a reliable picture of typical facility operation• Confidentiality and anonymity are difficult to

maintain

• Ideal if Seller commissions Phase I EAs on behalf of potential Buyers to create a level playing field, and due to time required

• Most common method for evaluating potential liabilities where site inspections are possible

• Evaluation process is widely recognized and accepted (ASTM E1527-13)• Buyers of real estate protected from Superfund liability by performing all appropriate inquiry (AAI),

no benefits to leaseholders or Sellers• Only satisfies the CERCLA AAI requirement • Non-ASTM scope considerations must be added to identify business environmental risks,

compliance concerns and hazardous building materials• Poorly-written evaluations can identify environmental conditions that are not significant or risky• Liability can be extended to Buyer and other stakeholders through Reliance Letters• Phase I EAs have a shelf life• Non-ASTM scopes can be developed to streamline process and better suit buyer needs, where ASTM

buyer protections are not being sought.

Phase I Environmental Site AssessmentsDue Diligence Execution

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• Better characterize the subsurface risks, and help reduce uncertainty• Site-specific implementation of a program to collect samples of soil, ground

water, surface water, building materials and other materials• Testing can include equipment and structures (i.e. Tank & Line Leak Detection or

other Testing)• Confirms the presence or absence of a problem – not necessarily the extent

Intrusive AssessmentsDue Diligence Execution

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PROS• Reliable, conservative approach leaves little to

speculation• Results can inform further action and likely to be

accepted by regulatory agency if action plan is needed

CONS• Investigations can get expensive• Time is needed which may not be practical within an

aggressive due diligence period• Disadvantage in a competitive sale• Creation of affect media information could require

disclosure to regulatory agencies;• Potential damage and disruption of property• Difficult to remain anonymous/ confidential

Presenter

Presentation Notes

Most commonly used processes for evaluating real estate liabilities ASTM International E 1527 process – results in an assessment that meets EPA standards that will afford protection against certain parts of CERCLA In many cases an alternate process may provide a more cost effective analysis that identifies the risk at the needed level Strict adherence to the AAI and ASTM standards are arguably not the “best” process, it is ONLY a process that meets the EPA requirements for “all appropriate inquiry” Does not provide relief from any other law or statute Some transactions involving operating business assets may have liabilities that may not be identified in a Phase I ESA AAI protects owners only, leaseholders do not benefit from paying for a study to meet AAI requirements Non-ASTM scope considerations must be added to the assessment in order to begin to satisfy other regulatory programs, such as UST compliance, waste management, wastewater and stormwater management, air emissions permits A poorly-written ESA report can compel a user to perform unnecessary tasks and studies; for example, the presence of hazardous materials on a site, even in a storage tank, is not necessarily a recognized environmental condition