ERCI Defender Backgrounder

CONFIDENTIAL

Defender Software Tools

Remedy Defender™Portfolio Defender™Due Diligence Defender™Due Diligence Defender™

Contact:

John RosengardJohn Rosengard(415) 982-3100

www.erci.com

© 2012 Environmental Risk Communications, Inc.

ERCI and Defender Software

ERCI incorporated in California in 1994

Initial customers: US DOE, FMC, Chevron

Software competence in: Software competence in:

Microsoft Excel, Access, and Project

Visual Basic for Applications (VBA)

Crystal Ball and @Risk (Monte Carlo modeling for Excel and Project) Crystal Ball and @Risk (Monte Carlo modeling for Excel and Project)

17 portfolios, 300 users

Remedy Defender: Single site analysis

Portfolio Defender: Rollup reports of Remedy Defender

Due Diligence Defender: Parametric models built for specific industries

Midstream gas

Sediments

Counterparty Defender: Credit-weighted analysis of counterparties sharing future environmental costs

© 2012 Environmental Risk Communications, Inc. 2

Needs of the Typical Defender User

GAAP Compliance / Audit Defense

ASC 410-30-25 Recognition of Environmental Obligations

ASTM E2137 for Estimating Environmental Liabilities

ASTM E2173 for Disclosing Environmental Liabilities

Performance Management

Strategic consistency: Cost benchmarks, risks, remedial alternatives Strategic consistency: Cost benchmarks, risks, remedial alternatives

Challenge current strategy: New options, accelerate / defer

Differentiate between reserve, asset retirement, OPEX, CAPEX spending

Change Management Change Management

Document site history, key assumptions

Prepare for any team turnover: Project manager, lead consultant, regulator, external counsel

Vendor Management

Identify best practices, lessons learned

Record cost benchmarks


Record cost benchmarks

3

RESERVE CASE: ($24,910,034)ENVIRONMENTAL BUSINESS PLAN

What is Defender?

I. SITE SUMMARY

Site Name County Landfill Business Unit 1001Project Manager Luke Vermeire Lead Internal Attorney Ryan Lafrenz

Project Code 01CLF Additional Internal Attorney n/aStreet 475 Sansome Street Business Unit or Owner Contact n/a

City San Francisco Public Affairs Coordinator n/aState California Real Estate Coordinator n/a

Zip Code 94111 External Counsel n/aLead Regulatory Agency EPA Offsite Landowner n/a

Superfund or NPL Site CA123456789 Third Parties n/a

Software for environmental liability teams

MeasurePRP Participant Yes Consultant (study) URS

PRP Share 75% Consultant (remediation/O&M) SCS EngineersUSEPA Regulatory Contact Jane Doe Property Tax Status n/a

USEPA Generator ID n/a Adjoining Property Owners Joe's tire shopState Regulatory Contact n/a Date Notified 5/12/2012

State Generator ID n/a Date Added 6/29/2012US EPA Region 9 Estimated Project Closure Date 7/4/2052Project Cause Landfill Operations Regulator's Contaminants of Concern CAM 17, VOCs, SVOCs, PCBs

Last Update Date 8/31/2012 Budget Approval Date 6/30/2012

II. ASC 410-30-25-15 Recognition Benchmarks

Analyze

Display

Disclose

PRP group completed RI in 2009

a. Identification and verification of an entity as a potentially responsible party

b. Receipt of unilateral administrative order

c. Participation, as a potentially responsible party, in the remedial investigation-feasibility study

Company recognized as PRP by EPA

5/12/2009

1/16/1999

1/16/1996

AO dated 1/16/1999 received by PRP group

How Does Defender Work?

Cost forecasting / estimating

Alternative analysis

FINANCIAL SUMMARY

C a s e C a s e C a s e C a s e

R 1 2 3Strategy Description Reserve Case Delay Project 5 Years Increased PRP

RecoveriesComplete Coverage

with Asphalt Cap

d. Completion of feasibility study

e. Issuance of record of decision

Expected 2016

Waiting for EPA to release ROD, expected 2013

PRP group completed FS in 2012

f. Remedial design through operation and maintenance, including post-remediation monitoring

6/29/2012

Monte Carlo modeling

Project controls

Audit support

R01

DISTRIBUTION CHARTSFUTURE VALUE 5-YR (2011-2015) ($9,967,590) ($521,445) ($10,409,933) ($10,508,806)

FUTURE VALUE 10-YR (2011-2020) ($16,867,332) ($11,554,072) ($17,798,058) ($19,075,710)

FUTURE VALUE 30-YR (2011-2040) ($24,910,034) ($25,503,923) ($25,840,760) ($26,186,143)

PRESENT VALUE 30-YR (2011-2040) ($12,599,881) ($8,963,293) ($13,219,348) ($13,911,252)

COST RECOVERIES $6,098,722 $6,247,194 $8,863,965 $6,535,437

OPERATING BUSINESS IMPACTS $0 $0 $0 $0

PROJECT CASH FLOWS NPV ($9,458,030) ($6,730,589) ($8,603,942) ($10,434,139)

Financial Assumptions: 2.00% I n f l a t i o n

III. STRATEGIC ALTERNATIVES

Reserve Case ($24,910,034)Delay Project 5 Years ($25,503,923)Increased PRP Recoveries ($25,840,760)Complete Coverage with Asphalt Cap ($26,186,143)

BUDGET VALUE

monitoring

Complete coverage with asphalt and reduced length of O&M by 5 yearsAdditional legal support to gain 10% more recovery from recalcitrant PRPsSame costs as Case R, delayed 5 years plus 5 years of PM, legal, etc. costsReserve case, most likely

p10 p50 p90 Expected Value Chart #Case R: Reserve CaseRemedial Costs 1,000,000$ 1,500,000$ 2,500,000$ 1,649,019$ R01Capping Acres 75 100 125 100.1 R02Capping Cost / Acre 70,000$ 85,000$ 100,000$ 85,043$ R03Material Cost 1 000 000$ 1 500 000$ 2 000 000$ 1 501 426$ R04

Probablistic Cost Modeling (Monte Carlo)

pp

R02

10.00% D i s c o u n t r a t e


Material Cost 1,000,000$ 1,500,000$ 2,000,000$ 1,501,426$ R04Yearly Monitoring Cost 125,000$ 150,000$ 225,000$ 165,085$ R05

Rcase

Case 1: Delay Project 5 Years-$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$

1Case

Click to Add Row

Click to Add Row

4

Defender – Index

User may select alternatives to update

Allows user to save a PDF copy for archiving

Navigation buttons for users

Allows user to save a copy of file for audit that removes privileged information


Defender – Plan Page

Site / project specific data, contact information, and

critical datescritical dates

Information regarding compliance with ASC 410-30-25-15

Recognition Benchmarks


Defender – Plan Page (cont.)

Strategic alternatives comparisoncomparison

Historical notes and Historical notes and summaries


Defender – Financial Summary & Site Narrative

Comparison of alternative cases and financial

summaries for analysis

User may store project manager notes, regulator correspondence, additional

i f ti d t ti


information or documentation regarding the site / project

Defender – Modeling

User inputs for ranges p gto be modeled

User inputs line items, unit cost, or units for analysis

Modeled expected values flow to individual case estimates


Defender – Modeling (cont.)

Various options for distribution charts (Weibull shown)

Distribution charts created for every modeled

line item


Defender – Case R

Main section for inputting cost estimates

User selected subtasks from pop-up list

Expected values from modeling sheetmodeling sheet


Defender – Case R (cont.)

Automatic WBS code lookup from company-defined Work

Breakdown StructureBreakdown Structure(ASTM WBS shown)

Cost recovery / PRP share calculations

Inputs for OPCO impacts


impacts

Defender – Case R (cont.)

Inputs for OPCO impacts (cont.)

Section for budgeting, reporting, analysis, and display


Report: “Bow Wave” Analysis

$110

$120

Concern: $1 spent ≠ $1 liability work-down

2011

$80

$90

$100

20102009

$60

$70

$80

($ M

M)

2006

2007

2008

$30

$40

$50

( 2007

$0

$10

$20Cumulative spending


$0

Cumulative Spend Budget Remaining 2006 2007 2008 2009 2010 2011

14

Report: “Bow Wave” Analysis

Goal: $1 spent ≈ $1 liability work-down

$110

$120

$80

$90

$100

$60

$70

$80

($ M

M)

2006-2011

$30

$40

$50

(

$0

$10

$20Cumulative spending


$0

Cumulative Spend Budget Remaining 2006 2007 2008 2009 2010 2011

Report: Scenario Comparison, 30-yr NPV, $MM

GW Liability

90%

100%

Percentiles GW Protection

Liability Work

0% $3.83 $5.13

10% $5.04 $7.63

20% $5.46 $8.78

30% $5 79 $9 84

70%

80%

90%30% $5.79 $9.84

40% $6.08 $10.91

50% $6.37 $12.06

60% $6.61 $13.07

70% $6.89 $14.15

50%

60%

ed

80% $7.24 $15.14

90% $7.77 $16.44

100% $9.92 $18.38

30%

40%

e:

Ori

gin

al

e:

Pro

po

se

10%

20%

Rese

rve

Rese

rve


0%$0 $5 $10 $15 $20

Ordinarily, there is a gap between reserve levels and lifecycle (NPV)

Report: Reserve History

8

9

10Future reserves: + $ 8.2 millionRecognition criteria and trigger date in Watch List

5

6

7

8

mil

lio

n

3

4

5 $

Actual spendingTypically lags reserves by two to ten years

0

1

2

2008 2010 2012 2014 2016 2018

Initial study

two to ten years

2008 2010 2012 2014 2016 2018

Original reserve:

Reserve HistoryA. $1.8M Costs to perform initial study [Reserved]B $2 6M Costs to conclude assessment explore options draft


Original reserve: $ 1.8 million

B. $2.6M Costs to conclude assessment, explore options, draft feasibility study or EE/CA (add in 2010)

C. $4.0M Remedy implementation update (add in 2011)D. $1.6M O&M cost update (add in 2013+)

Recognition Triggers of Future Losses

New tool for environmental remediation liability forecasting

ASC 410-30-50-9 “Disclosures that Are Encouraged but Not Required”

Displays to management – for potential disclosure – future reserve changes

Site-specific

Recognition trigger is specific and measurable

Range of costs and timing notedg g

Site Recognition Trigger Low Value($ millions)

Mid Value($ millions)

High Value($ millions)

Timing

Site 1 CAMU size and installation year 1.0 1.5 2.25 3/31/2014

Site 2 Remedy selection: SVE for 10 years 1.5 2.25 4.5 2014-2015

Site 3 Remedy selection: P&T for 30 years 2.0 2.5 3.0 1/1/2015

Site 3 Source removal: 300,000 CY soil (lead) 2.5 3.0 3.5 1/1/2015

Site 4 Scope of investigation 0.5 0.7 0.8 1/1/2014

Site 5 NRDA claim/damages 0.5 1.0 2.0 2015-2018

Site 5 30% design of soil removal 20,000 MT (lead) 1.0 2.5 4.5 7/1/2016

Site 5 Remedy selection for 195,000 MT (solvents) 7 12 16 7/1/2016


Site 6 Building demo, redevelopment (ARO or CAPEX) 2.5 5.0 5.5 2013-14

Uncertainty is Normal

Expected Cost Estimate Accuracy Along the Superfund Pipeline


Source: USEPA, A Guide to Developing and Documenting Cost Estimates During the Feasibility Study, July 2000

19

Audit Experience

Fo t ne 500 Company Division Fortune 500 (sales) Auditor Audits

Chevron

Chevron Environmental Management Co.

Chevron Pipe Line Co

Chevron Canada, Ltd.3 Annual, plus

quarterly items

Texaco Downstream Properties, Inc.

Duke Energy

Field Services

Duke Energy Field Services

Natural gas collection and pipelines173 Annual

El Paso CorpNow part of KinderMorgan

Diversified energy company488 Annual, plus

special itemsDiversified energy company p

FMCCorporate-wide

Diversified manufacturer475 Annual

Hewlett-PackardCorporate-wide

Computer and microelectronics manufacturer10 Annual or less

(not material)

Northrop

Grumman

Corporate-wide

Aerospace and defense104

and DCAAAnnual

Port of SeattleCorporate-wide

Regional airport and marine port authorityNA

and State AuditorAnnual

C t idTesoro Petroleum

Corporate-wide

Oil refinery and marketer101 Annual, plus

special items

TRW AutomotiveCorporate-wide

Automotive parts161 Annual

UnivarCorporate-wide

Private Annual


UnivarChemical processor and distributor

Private Annual

DelphiCorporate-wide

Automotive parts163 Annual, plus

quarterly items

Defender Value Proposition

Calculating core business effects of environmental projects

Assess, anticipate, price, and react to risks

Apply reserve dollars, operating expenses (OPEX), capital expenditures (CAPEX) fairly and accurately

Maintain strategic consistency

Using standard financial terms

Budget: 2-5 years

Reserves: 3-30 years

Cost-to-close (lifecycle)

Expected value, future value, present value

Documenting forecasts for audit defense

Responding to changing sources of risk Responding to changing sources of risk

Time to regulator acceptance or NFA

Viability of cost recovery source

Pe manence effecti eness of emed


Permanence, effectiveness of remedy

Regulator turnover

21

Defender Deployment

Duration: 90 days

Key Steps

Define the Work Breakdown Structure (WBS)( )

Import current budgets and reserves (with backup)

Populate the history, issues / alternatives, and other narrative

Adjust the budget vs. actual reporting process Adjust the budget vs. actual reporting process

Key Performance Indicators

Reduction of time spent on reserve updates / variances

Reduction of time spent on project handoffs Reduction of time spent on project handoffs

More time thinking critically about the reserve watch list

Fewer reserve surprises

B tt t k h ld ti t i d i i Better stakeholder reactions to upcoming decisions

Minimal time with auditors and improved auditor acceptance

>90% of reserve adjustments (by $) come from the reserve watch list


Documents

ERCI Defender Backgrounder