Financial SuretyInstruments/Mechanisms

Anine Grumbles Radiation Health PhysicistWashington Department of Health

Regulatory Requirementsfor Financial Surety

Caveat:

The method of surety does not relieve the requirement of an applicable decommissioning funding plan and cost estimate.

Financial Surety InstrumentsWAC 246-235-075 (4) Each applicant shall submit a certification that financial assurance for decommissioning: $$ Amount of approved cost estimate. In place prior to use of any RAM. Provide a signed original of financial instrument unless

one is already in place.

Approved FS Instruments (a) Prepayment. (b) A surety method, insurance, or other guarantee

method. (c) An external sinking fund in which deposits are made at

least annually, coupled with a surety method or insurance, the value of which may decrease by the amount being accumulated in the sinking fund.

(d) Statement of intent. (e) Other methods of financial assurance as approved by

the department.

PrepaymentPrepayment is the deposit of sufficient funds to pay decommissioning costs. Funds must be deposited prior to the start of operation. An account segregated from licensee assets and outside

the licensee's administrative control. Stipulated specifically for the purpose of

decommissioning.

Prepayment Forms Trust. Escrow account. Government fund. Certificate of deposit. Deposit of government securities.

Surety/Insurance/Guarantee These methods guarantee that decommissioning costs will be paid should the licensee default. Acceptable surety methods: Surety bond, Letter of credit or line of credit. Insurance policy Parent company guarantee Self- guarantee

Requirements for Surety/Insurance/Guarantee 1 must be open-ended or, if written for a specified term,

must be renewed automatically OR >90 days prior to the renewal date, the issuer notifies the

department, the beneficiary, and the licensee of its intention not to renew.

Requires full face amount be paid to the beneficiary automatically prior to the expiration without proof of forfeiture if the licensee fails to provide a replacement acceptable to the department within thirty days after receipt of notification of cancellation.

Requirements for Surety/Insurance/Guarantee 2 Must be payable to acceptable trust established for

decommissioning costs. Segregated from the licensee's assets, Outside the licensee's administrative control, and adequacy of the trust funds is to be assessed based on an

assumed annual one percent real rate of return..

Requirements for Surety/Insurance/Guarantee 3

Surety must remain in effect until the department has terminated the license.

External Sinking Fund Deposits made at least annually Coupled with a surety method or insurance The value of surety may decrease by the amount being

accumulated in the sinking fund Account segregated from licensee assets, and Outside the licensee's administrative control The total amount of funds sufficient to pay

decommissioning costs at the time termination of operation is expected

External Sinking Fund Methods Trust Escrow account Government fund Certificate of deposit Deposit of government securities The surety/insurance/guarantee provisions apply.

Statement of Intent Only for federal, state, or local government licensees: Contains cost estimate $$ amount established in DFP. Indicates commitment by government entity to obtain

funds for decommissioning when necessary. Signed by someone with fiduciary authority.

Other Methods of Assurance Approved by the department. If the alternate method meets, at a minimum,

The requirements of 10 C.F.R. 30.35 and Associated NRC guidance.

Canceling/Replacing/Transferring Financial instruments are designed so that the licensee

cannot cancel them without regulatory agency approval.90 days prior to end of instrument term:1. Licensee must submit replacement mechanism for

review and approval by regulatory agency.2. If approved, new replacement instrument must be

implemented prior to cancellation of instrument currently in place.

3. Regulatory agency should have some way of documenting that the instrument has been canceled and replaced with the new instrument

In Depth Look at Mechanisms

NUREG 1757 Volume 3, Rev 1.

NRC guidance for financial surety

Certification - Not in WAThe NRC and some states allow certification of arbitrary amounts of financial surety without a decommissioning funding plan. radioactive materials with T ½ > 120 days

$113,000 $225,000 $1,125,000Sealed, plated, foil

sourcesUnsealed radioactive

materialUnsealed radioactive

material

>1010 - <1012 >103 - <104 >104 - < 105

Source material>10 mCi - <100 mCi

For multiple nuclides, the unity rule applies.

Certificate of Deposit (CD)* Deposit of cash sufficient to cover the cost of

decommissioning to a bank, by licensee. Licensee receives CD Two Types CDs

Negotiable – whoever holds the CD 10 received the funds from the bank when the CD reaches maturity. Regulatory agency must be in possession of the CD.

Non-negotiable – payee designated on the certificate may receive the funds at maturity. The regulatory agency must remain as the payee

Must be fully insured by FDIC (each CD insured up to 100,000).

Escrow Accounts* Irrevocable, three party written agreement where the

licensee transfers asset into an escrow account, such as a bank, for the purpose of financial assurance for decommissioning.

Escrow agent manages the account according to written terms of agreement with the regulator, for the benefit of the beneficiary.

Functions like a saving account except Monies are legally segregated for a specific purpose The account is administered by someone with fiduciary

responsibility to keep or use the property in the account

Escrow Agent Qualifications Financial institution regulated and examined by a federal

or state agency. Should be insured by FDIC Must contain sufficient assets, valued at current market

value, to complete decommissioning activities Needs a fund balance statement to assess value Must be kept up to required value for surety Recommend having an agency lawyer involved

Government Bonds/SecuritiesThe licensee deposits securities backed by the federal state or local governments into a trust fund, escrow account, or government fund.

Criteria of acceptability The issuer of the bonds must be qualified and

underwritten by the government. Must contain sufficient securities, valued at current market

value to complete decommissioning activities. Terms and conditions in written trust or escrow agreement

External Sinking Funds

A mechanism through which a licensee can gradually prepay for decommissioning using a combination of prepayment instruments in conjunction with a surety method. As the value of the prepayment increases over time the amount of surety can be decreased. The full amount of the decommissioning costs must be available at all times.

Acceptable criteria includes that of issuer, level of coverage, and proper documentation of terms and conditions.

Insurance Policies - 1A guarantee by an insurance company to fund decommissioning Required criteria: Must be open ended or if written for a specified term

must be renewed automatically If not renewing: must provide notice to the beneficiary and

the licensee of intent not to renew at least 90 days prior to the renewal date.

Insurance Policies - 2 The insurance policy must also provide that the fullface

amount of the policy must be paid to the beneficiary, automatically prior to the expiration without proof of forfeiture, if licensee fails to provide an alternate financial assurance that is acceptable within 30 days after notice of cancellation.

This surety method (adequate replacement) must remain in effect until the licenses terminated.

Insurance Policies - 3Criteria of acceptance: Must be licensed by state regulatory authorities as insurance provider in one or more states. Oversight by at least one US state regulatory authority. Policies issued by captive insurers may not be used for

financial surety for decommissioning. Must cover the full amount required for decommissioning

costs. Must have proper documentation of policy and either for a

standby trust agreement, or certification of financial assurance.

Qualified Insurer? National Association of Insurance Commissioners 816. 842. 3600 http://www.naic.org

Remember that the insurance policy must be deposited with the regulator. Washington requires a standby trust fund be set up with the policy.

Letters of Credit

A formalized written line of credit extended by a bank on behalf of a licensee this credit must only be used to fund the decommissioning in the event that the licensee does not perform its own decommissioning.

Must be irrevocable –cannot be canceled prior to expiration date.

The arrangement also requires that a licensee repay with interest any funds drawn from the letter of credit.

Letters of Credit - 2 Must be open-ended or If written for a specified term

such as five years, must be renewed automatically or, If not renewing: must provide notice to the

regulator/beneficiary and the licensee of intent not to renew at least 90 days prior to the renewal date.

Must provide the full-face amount of the policy must be paid to the beneficiary, automatically prior to the expiration without proof of forfeiture, if licensee fails to provide an alternate financial assurance that is acceptable within 30 days after notice of cancellation.

Letters of Credit - 3 Criteria of qualification: Must be federally regulated: National Association (N.A.) Federal Deposit Insurance Corporation (FDIC) Institution

Directory: https://www5.fdic.gov/idasp/advSearch_warp_download_all.asp?intTab=1

Office of the Comptroller of the Currency (OCC): http://www.occ.treas.gov

State regulated institution – use the FDIC Institution Directory: https://www5.fdic.gov/idasp/advSearch_warp_download_all.asp?intTab=1

Lines of Credit Shorter-term extension of credit

from banks to licensee. Less formal than a letter of credit For decommissioning surety must

have all of the binding arrangements of the letter of credit.

This is not listed as one of the NRC or Washington state approved methods of surety.

Qualified Issuer? National Association of Insurance Commissioners 816. 842. 3600 http://www.naic.org

Remember that the insurance policy must be deposited with the regulator. Washington requires a standby trust fund be set up with the policy.

Parent Company Guarantees A guarantee from a licensee’s corporate parent to fund

and carry out decommissioning activities if the licensee fails to do so.

Corporate parent must annually pass one of two financial tests within 90 days of the close of each fiscal year to be a viable guarantee

Guarantee must remain in force unless corporate parent sends notice of cancellation by certified mail to regulator and licensee at least 120 days in advance.

Parent Company Guarantees - 2 If the parent talked company no longer passes the

financial test it must provide alternate financial assurance if the licensee does not.

If guarantee is brought upon because the licensee fails to carry out decommissioning, parent company is responsible to either fund or carry out the decommissioning.

Standby trust fund would be used to manage these funds exclusively for decommissioning.

Parent Company Guarantees - 3Criteria for qualification Must be provided by the corporate parent of the licensee. Parent company must have majority control of the

licensee’s voting stock. If Bonds issued: Bond ratings must apply to us standing

rated bonds that are not secured by insurance, letter of credit, other collateral, or guarantee. Must have been issued directly by the corporate parent

company and no other and Must meet one of two financial tests:

Parent Company Financial Test I Corporate parent company must have the following: Two of the three following ratios, and

1. Ratio of total liabilities to net worth less than 2.0.2. A ratio of the sum of net income plus depreciation,

inflation, and amortization to total liabilities greater than 0.1.

3. A ratio of current assets to current liabilities greater than 1.5.

Net working capital and tangible net worth at least six times the DCE, or certification amount if that is used, and…

Parent Company Financial Test I Tangible net worth of at least $10 million, and Assets located in the United States amounting to at least

90% of total assets or at least six times the current DCE, for certification amount if NRC or used by state

Parent Company Financial Test IICorporate parent company must have the following: A current rating for its most recent bond issuance of AAA,

AA, A, or BBB* as issued by S&P or Aaa, Aa, A, or Baa* as issued by Moody’s, and

Tangible net worth of at least six times the DCE, or certification amount if it is used, and

Tangible net worth of at least $10 million, and Assets located in the United States amounting to at least

90% of total assets or at least six times the current DCE, for certification amount if NRC or used by state.

* BBB- and Baa3 ratings do not qualify 10 CFR 30, Appendix A.

Parent Company Guarantees - 4 Parent company guarantee must be in the amount in the

DCE or certification. If the amount increases the parent company must revise

the guarantee to assure the higher amount, replace the guarantee with a different financial mechanism in the new amount.

Proper documentation includes a written guarantee agreement, CEO letter certifying licensee is a going concern, specifies licensee’s tangible net worth, any requirement for filing form 10K with SEC, & date fiscal year begins.

Parent Company Guarantees - 5Proper documentation includes all of the following: A written guarantee agreement. Letter from CEO certifying licensee is a going concern.

Specifies licensee’s tangible net worth. Any requirement for licensee to file a Form 10k with SEC. Date fiscal year begins.

Auditor’s special report by company’s independent certified public accountant, corroborating demonstration of the financial test, and schedule reconciling financial test numbers from the CFO/PC guarantee agreement and financial statement.

Parent Company Guarantees - 6Proper documentation includes all of the following: Parent company’s audited financial statements for the

most recent fiscal year. Independent CPA must state that financial statements fairly

and unconditionally represent the terms financial condition in accordance with generally accepted accounting principles.

An adverse statement must provide opinions of the issues. If any doubts, consult AG.

Evidence of majority control of voting stock. Amount of the guarantee = DCE.

Self GuaranteeA federal, state, or other government agency Usually provides a letter of intent Signed by upper management with fiduciary control and

responsibility.

All others must meet an appropriate financial test. Similar to Parent company guarantee, but amounts are different.

Self Guarantee - 2 A written guarantee by a licensee that it will fund and

carry out decommissioning activities. Company must ANNUALLY pass and applicable financial

test. (10 CFR 30, Appendix C, D, or E) Within 90 days close of the fiscal year.

Self Guarantee - 3 Must not be used in combination with any other financial

assurance mechanism. May not be used when there is a parent company holding

majority control of voting stock. Must remain in force unless the licensee sends notice of

cancellation by certified mail, 120 days in advance of the annual renewal and replaced.

Licensee must provide alternative financial assurance if they no longer pass the financial test or cancel self-guarantee.

Self Guarantee - 4 Must show adequate financial strength to provide

guarantee. Licensees financial statements must be prepared in

accordance with generally accepted US accounting principles.

Must be verified as accurate by an independent CPA.

Self Guarantee - Financial Test Commercial companies that issue bonds Tangible net worth at least 10 times the current

decommissioning cost estimate. Assets located in the US amounting to at least 90% of

total assets or 10 times the current cost estimates for all decommissioning activities for which the company is responsible.

A current rating for their most recent bond issuance:S&P: AAA, AA, or AMoody’s: Aaa, Aa, A Anything else is not acceptable

At least one class of equity securities registered under the securities exchange act of 1934.

Self Guarantee - Financial Test Commercial companies that do NOT issue bonds Tangible net worth greater than $10 million and at least

10 times the current decommissioning cost estimate. Assets located in the US amounting to at least 90% of

total assets or 10 times the current cost estimates for all decommissioning activities for which the company is responsible.

A ratio of cash flow divided by total liabilities greater than 0.15 in a ratio of total liabilities divided by net worth less than 1.5. (Cash flow = sum of net income + depreciation, depletion, and amortization.)

Self Guarantee - Financial Test Nonprofit colleges and universities that issue bonds A current rating for their most recent “uninsured,

uncollateralized, and unencumbered” bond issuance:S&P: AAA, AA, or AMoody’s: Aaa, Aa, A anything else is not acceptable

Ratings of A- by S&P or A 3 by Moody’s are insufficient

Self Guarantee - Financial Test Nonprofit colleges and universities that do not issue bonds.The licensee must have unrestricted endowment consisting of assets located in the US amounting to at least $50 million, or at least 30 times the current cost estimates for all decommissioning activities for which the company is responsible.

Non-profit Hospitals – check NUREG 1757, Vol 3

Trust Funds

Two types: Standby Trust Trust

Standby Trust Funds A trust that is not yet funded, but is otherwise ready to

accept the monies in the event they are received from a particular source such as a surety bond, letter of credit, our insurance.

Monies in a standby trust fund are legally segregated for a specific purpose.

Administered by a trustee, with fiduciary responsibility to keep and use the equity in the fund for the benefit of the beneficiary.

When funded, monies would be available to pay for the cost of decommissioning.

Trust FundsA trust fund functions much like a savings account, except: Monies are legally segregated for a specific purpose. Administered by a trustee, with fiduciary responsibility to

keep or use the equity in the fund for the benefit of the beneficiary.

When funded, monies would be available to pay for the cost of decommissioning.

Standby Trust Funds WAC 246-235-075 ()() specifies standby trust fund be set

up to administer financial surety payments from licensees.

Acceptable trustee includes an appropriate federal or state Government agencies and financial institutions that have the authority to act as trustees.

Trust operations must be regulated and examined by a federal or state agency

Standby Trust / Trust FundsCriteria of qualification: Must be federally or state regulated: National Association Federal Deposit Insurance Corporation (FDIC) Institution

Directory: https://www5.fdic.gov/idasp/advSearch_warp_download_all.asp?intTab=1

Office of the Comptroller of the Currency (OCC) http://www.occ.treas.gov

State regulated institution – use the FDIC Institution Directory: https://www5.fdic.gov/idasp/advSearch_warp_download_all.asp?intTab=1

Standby / Trust Funds Or, Call the state banking authority and confirm the

institution is state regulated and has state regulated trust operations.

Standby trust do not need to contain any money or property of the time they are established. As a financial instrument is drawn upon, the funds placed in the standby trust must meet the required amount of DCE, valued at current market value.

Standby / Trust FundsDocumentation must include Standby or trust agreement with terms and conditions Schedule A – IDs the name and address of the licensee,

materials license numbers, addresses of licensed activity areas, the amount of the agreement and the date on which these amounts were last adjusted and approved by the regulator.

Schedule B – lists the property, securities, or other liquid assets used to establish the initial trust fund.

Standby / Trust FundsDocumentation must include Schedule C – specifies the compensation to be paid by the

license to the trustee for services. Specimen certificate of events and specimen certificate of

resolution provide the format for instructing the trust deed to release monies from the trust in order to fund decommissioning activities at the licensee’s facility.

A letter of acknowledgment to verify execution of the trust agreement; certifies the trustee signature and authority to enter into the agreement.

Copy of DFP or certification of financial assurance.*

Trust Funds Continued A trust must at all times contain sufficient assets, valued

other current market value, to complete decommissioning activities.

The trust fund must be fully funded with a market value at least as great as the licensee’s current decommissioning cost estimate.

There should be documentation verifying the amount in the trust such as a receipt from the bank or trustee.

Trust Funds Continued If the licensee’s cost estimate increases, the licensee must

do one of the following:1. Revise the trust to the higher amount2. Obtain another financial mechanism to make up the

difference between the new coverage level and the amount in the trust

The agreement must provide the trustee with authorization to carry out the decommissioning.

Statements of Intent A commitment by a federal state or local government

licensee to request and obtain decommissioning funds from its funding body whenever necessary.

Must include either documentation to support the use of that certification or a signed statement indicating that the amount guaranteed by the statement of intent is supported by a decommissioning funding plan with a site-specific cost estimate.

Statements of Intent The signatory should be the head of the agency or a

designee with authority to commit the agency to requesting the funds.

Letter of intent must accompany the decommissioning funding plan.

Surety Bonds A payment surety bond is a guarantee by a surety

company that it will fund decommissioning activities of the principal (the licensee) fails to do so.

Processing Bankruptcy/DefaultsNUREG 1556 Vol 15 Appendix G Licensees required by regulations to notify regulator

Immediately, upon filing voluntary or involuntary petition for bankruptcy

In writing May learn from other sources:

Telephone call News/paper report Discovery during inspection

Bankruptcy and Defaults - 2

Ensure that all licensed material possessed by the licensee is adequately controlled.

The licensee is not terminated because of default. Licensee or appointed trustee should be notified that the

bankruptcy does not relieve them of obligations to comply with the license, regulations, and radiation safety program.

Bankruptcy and Defaults - 3 Regulator should provide written notification to licensee,

trustee, receiver in bankruptcy, or property owner of their obligations: To control the site Decontaminate and decommission Comply with applicable regulations and conditions of the

license. Conduct a health, safety, and security assessment to

determine if immediate action is needed to secure the property and material an impact

Bankruptcy and Defaults - 4 States should notify their legal counsel of events NRC has DOJ attorney on Bankruptcy Review Team

“Calling” a Financial Instrument Last resort option Only if trustee, receiver in bankruptcy, or property owner

cannot or will not decommission and close