erci defender backgrounder
DESCRIPTION
TRANSCRIPT
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
© 2012 Environmental Risk Communications, Inc.
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
© 2012 Environmental Risk Communications, Inc.
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
© 2012 Environmental Risk Communications, Inc. 5
Defender – Plan Page
Site / project specific data, contact information, and
critical datescritical dates
Information regarding compliance with ASC 410-30-25-15
Recognition Benchmarks
© 2012 Environmental Risk Communications, Inc. 6
Defender – Plan Page (cont.)
Strategic alternatives comparisoncomparison
Historical notes and Historical notes and summaries
© 2012 Environmental Risk Communications, Inc. 7
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
© 2012 Environmental Risk Communications, Inc. 8
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
© 2012 Environmental Risk Communications, Inc. 9
Defender – Modeling (cont.)
Various options for distribution charts (Weibull shown)
Distribution charts created for every modeled
line item
© 2012 Environmental Risk Communications, Inc. 10
Defender – Case R
Main section for inputting cost estimates
User selected subtasks from pop-up list
Expected values from modeling sheetmodeling sheet
© 2012 Environmental Risk Communications, Inc. 11
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
© 2012 Environmental Risk Communications, Inc. 12
impacts
Defender – Case R (cont.)
Inputs for OPCO impacts (cont.)
Section for budgeting, reporting, analysis, and display
© 2012 Environmental Risk Communications, Inc. 13
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
© 2012 Environmental Risk Communications, Inc.
$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
© 2012 Environmental Risk Communications, Inc. 15
$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
© 2012 Environmental Risk Communications, Inc. 16
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
© 2012 Environmental Risk Communications, Inc. 17
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
© 2012 Environmental Risk Communications, Inc. 18
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
© 2012 Environmental Risk Communications, Inc.
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
© 2012 Environmental Risk Communications, Inc. 20
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
© 2012 Environmental Risk Communications, Inc.
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
© 2012 Environmental Risk Communications, Inc. 22