CONFIDENTIAL

Environmental Counterparty Trackingp y g

Contact:

John RosengardJohn Rosengard(415) 982-3100

www.erci.com

© 2012 Environmental Risk Communications, Inc.

Outline

Need for Environmental Counterparty Tracking

Principles for an Environmental Counterparty Tracking Process

Process Overview Process Overview

Business Case / Value Proposition Analysis

Deployment Process

Path Forward

© 2012 Environmental Risk Communications, Inc. 2

Need for Environmental Counterparty Tracking

Environmental cleanups are long-term 5 to 15 years in design and

remediation phases

Normal Default: 1.4%/year

Randomized for Allocationp

30+ years in O&M

Financial risk sets in over time: bankruptcies will remove 1.4% / annually of the PRP allocation

Allocation

annually of the PRP allocation from a given group each year

In a large group, after 30 years, only 65.5% will remain (see

hi )graphic)

Calculating counterparty risk is required under FASB 157(f), now in GAAP as “ASC 410-30-25-12

Randomized for Allocation and Credit Rating

in GAAP as ASC 410 30 25 12 Uncertainties Related to the Allocation of Estimate“

© 2012 Environmental Risk Communications, Inc.3

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 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 th t ti ll ibl ti th tother potentially responsible parties or the government.

© 2012 Environmental Risk Communications, Inc. 4

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

Process Overview

• Request &

Primary Test:D & B Scores

Secondary Test: 10K Data

Review

Tertiary Test:EPA ABEL

Model Negotiate Cash Out Settlement

Evaluate the PRP’s financial condition using EPA’s ABEL M d l (40 CFR

Evaluate and report on two specific Dun &

Bradstreet scores,

evaluate financial reports from

companies that failed Primary

Test• Review financial

Fail FailFAIModel (40 CFR

264.151)

,compare to agreed

metrics

• Review financial data for available

cash and cash flow from continuing operations,

Provide alternative form of Financial Assurance [e.g.,

Fail

IL

p ,potential trends, and/or parent

ownership

parent guaranty, letter of credit,

insurance]

Fail

PA

PA

PA

PA

Company Meets Environmental Counterparty

SS

SS

SS

SS

© 2012 Environmental Risk Communications, Inc. 6

Tracking Requirements

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 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

Value Proposition to the PRP Group:

o Ten member PRP Group

No Action B Common Co nsel ERCI

po Each PRP has 10% allocationo $1 million in future cash callso Random range of credit ratings

No Action By Common Counsel ERCI

Common Counsel $0 $16,00040 hours/quarter, $100/hr

$0

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 ECT Failure

$0 to $100,000 $0* $0*

Recoveries in Chapter 11 ($50 000 to $0) $0* $0*Recoveries in Chapter 11 ($50,000 to $0) $0 $0

Total $0 to $100,000 $22,000 $15,000

© 2012 Environmental Risk Communications, Inc. 8

* Assumes DNBi Report review prevents all defaults

Deployment Process

Engage PRP group, modify PRP agreement

Develop / refine a site’s “future cost model”

QC for comprehensiveness, standard use of inflation, and discount ratesQ 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 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 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 Complete Primary, Secondary, and Tertiary Criteria Tests

Report to the PRP Group and bring failing PRPs to workout stage

Complete reviews every quarter

© 2012 Environmental Risk Communications, Inc. 9

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 languageg 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 Follow on work: One time analysis, bankruptcy affidavits, major updates to future cost 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