Post on 21-Jan-2018
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
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Who has been involved in an environmental due diligence project?
What has changed over time?
Warm-upEnvironmental Due Diligence Strategy for Petroleum Marketing Transactions
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Pre-Planning Considerations
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Environmental Due Diligence Strategy for Petroleum Marketing Transactions
• 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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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
Stakeholders• Buyer Shareholders• Seller Shareholders• Traditional Lenders• Investors/Partners
• Private Equity• REITs• JVs
• Employees
Due Diligence Process Requirements Determined by:
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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
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
Know where to focus
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EHS ComplianceSub-surface Impacts
Third Party Claims or Obligations
Structural Abatement
Pre-planning Considerations
People
EHS Management Systems
CSR/Sustainability
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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Pre-planning Considerations
The EHS transaction team must be capable of addressing each component!
Pre-planning Considerations
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Due Diligence Execution
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Environmental Due Diligence Strategy for Petroleum Marketing Transactions
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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• 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
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
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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
EHS ComplianceDue Diligence Execution
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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
• 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
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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
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Transition & Integration
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Environmental Due Diligence Strategy for Petroleum Marketing Transactions
• 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
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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
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• 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
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The contents of this presentation are for informational and educational purposes and not intended to be construed as professional advice.
Question or Comments?Environmental Due Diligence Strategy for Petroleum Marketing Transactions
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Bill MacDonaldOil & Gas Segment LeaderAntea Group801.560.3160bill.macdonald@anteagroup.com
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
Environmental Due Diligence Strategy for Petroleum Marketing Transactions
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• 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
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Appendix B
Environmental Due Diligence Strategy for Petroleum Marketing Transactions
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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