oEPA
United States
Environmental Protection
Agency
Office of
Solid Waste and
Emergency Response
DIRECTIVE NUMBER: 9477.05(83)
*
TITLE: Capital Requirement of the Financial Test for
Assurance of Closure and Post-Closure Care at
Hazardous Waste Management Facilities
APPROVAL DATE: 12-9-83
EFFECTIVE DATE: 12-9-33
ORIGINATING OFFICE:
B FINAL
Office of Solid Waste
D DRAFT
STATUS:
[ ] A- Pending OMB approval
[ ] B- Pending AA-OSWER approval
[ ] C- For review &/or comment
[ ] D- In development or circulating
REFERENCE (other document*): headquarters
OSWER OSWER OSWER
VE DIRECTIVE DIRECTIVE Dl
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PARTS 264 AND 265 SUBPART H - FINANCIAL RESPONSIBILITY DOC: 9477.05(83)
Key Words: Financial Responsibility Requirements
Regulations: 40 CFR Parts 264, 265
Subject: Capital Requirement of the Financial Test for Assurance of Closure
and Post-Closure Care at Hazardous Waste Management Facilities
Addressee: Mr. Allan B. Mitchell, Mitchell & Schultz, Inc., P.O. Box 190,
310 E. Lee, Sapulpa, Oklahoma 74066
Originator: William D. Ruckelshaus
Source Doc: #9477.05(83)
Date: 12-9-83
Summary:
The financial test is the means by which a financially sound firm may
demonstrate its ability to cover the costs of closure and post-closure. This "
test differs from other acceptable mechanisms for assurance of financial respon-
sibility. In the event of abandonment or bankruptcy, there is no special fund
of money that EPA can use to properly close and maintain a facility. Therefore,
it is imperative that the Agency knows that a firm passing the test is viable
and that sufficient funds would remain even if the financial position of the
firm were to change.
The financial test determines the needed safety margin. There are two
alternative sets of criteria found in §264 and §265. The first alternative is
the "ratios" test* which requires a net working capital of at least six times
the sum of the closure and post-closure estimates. To assure that the closure
and postclosure costs themselves would not cause insolvency, the Agency originally
determined that a firm should have net working capital of at least twice the
cost estimates. However, in studying bankruptcies, the Agency discovered that
many firms experienced a rapid deterioration of financial condition in the
several years prior to business failure. In such cases, net working capital
fell by an average of 66% in two years. Thus, a multiple of six (a factor of
two—to ensure ability to pay—times three—to protect against rapid deteriora-
tion) was found to be necessary.**
The second alternative is the "bond rating" test.* This assures viability
and credit-worthiness, as opposed to predicting bankruptcy as in the "ratios"
test. Both Moody's and Standard and Poor's look at many factors, including
ratios, in assigning & rating, e.g. firm size, ability to raise money easily,
etc. These firms also have a statistically lower business failure rate than
those that pass the "ratios" test.
Over 90% of those firms wishing to pass the financial requirements test are
able to do so. EPA believes that these requirements are consistent with its
responsibility to protect human health and the environment.
*These tests are only some of the criteria included in the financial test.
**The ratios test specifies other ratios that must be met in addition to the
net working capital requirement [§264.143(f)(1)(i) , 265.143(e)(l)(u)].
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9^77.05 (83)
Key Words; Closure, Financial Test
Regulations; 40 CFR Parts 264, 265
Subject; Capital Requirement of the Financial Test for Assurance of
Closure and Post-Closure Care at Hazardous Waste Management
Facilities
Addressee; Mr. Allan B. Mitchell, Mitchell & Schultz, Inc., P.O.
Box 190, 310 E. Lee, Sapulpa, Oklahoma 74066
Originator; William D. Ruckelshaus
Date; 12-9-83
Summary; The financial test is the ireans by which a financially
sound firm may demonstrate its ability to cover the costs of
closure and post-closure. This test differs from other acceptable
mechanisms for assurance of financial responsibility. In the
event of abandonment or bankruptcy, there is no special fund of
money that EPA can use to properly close and maintain a facility.
Therefore, it is imperative that the Agency knows that a firm
passing the test is viable and that sufficient funds would
remain even if the financial position of the firm were to change.
The financial test determines the needed safety margin. There are
two alternative sets of criteria found in §264 and §265. The
first alternative is the "ratios" test which requires a net
working capital of at least six times the sum of the closure and
post-closure estimates. To assure that the closure and post-closure
costs themselves would not cause insolvency, the Agency originally
determined that a firm should have net working capital of at
least twice the cost estimates. However, in studying bankruptcies,
the Agency discovered that many firms experienced a rapid deterioration
of financial condition in the several years prior to business
failure. In such cases, net working capital fell by an average
of 66% in two years. Thus, a multiple of six (a factor of two—to
insure ability*to pay—times three—to protect against rapid
deterioration) was found to be necessary. '
The second alternative is the "bond rating" test. This assure?
viability and credit-worthiness, as opposed to predicting bankruptcy
as in the "ratios" test. Both Moody's and Standard and Poor's look
at many, factors, including ratios, in assigning a rating, e.g.
firm size, ability to raise money easily, etc. These firms also
have a statistically lower business failure rate than those that
pass the "ratios" test.
Over 90% of those firms wishing to pass the financial requirements
test are able to do so. EPA believes that these requirements are
consistent with its responsibility to protect human health and the
environment.
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Mr. Allan B. Mitchell C^
Mitchell & Schultz, Inc. . »
P.O. Box 190 w
310 E. Lee ^
Sapulpa, Oklahoma 74066 ^
NJ
Dear Mr. Mitchell: ^
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Thank you for your letter of October 23 in which you \
question the net working capital requirement of che financial "f
test for assurance of closure and post-closure care at '^
Hazardous waste management facilities. The financial test w
is a means by which a financially sound firm may demonstrate ^
its ability to cover the costs of closure and post-closure. 2
oc
The financial teat differs from other acceptable mechanisms **
for assurance of financial responsibility. In the event of =
abandonment or bankruptcy, there is no special fund of money
that FPA can use to properly close and maintain a facility.
Therefore, it is imperative that the Agency be assured that
a firm passing the test is viable and that sufficient
funds would remain available even in the event of a change
in the financial position of the firm.
In developing the financial test, the Agency extensively
analyzed over 300 possible tests, applying them to known
bankruptcies to" determine which test would provide the needed
safety margin while allowing as many viable firms as possible
to pass the test. The result was the two alternative sets
of criteria found in 40 CFR Parts 264 and 265.
The first alternative, the "ratios" test, requires a
net working capital of at least six times the sum of the
closure and post-closure cost estimates. To assure that the
closure and post-closure costs themselves would not cause
insolvency, the Agency originally determined that a firm
should have net working capital of at least twice the cost
estimates. However, in studying bankruptcies, the Agency
discovered that many firms experienced a rapid deterioration
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of financial condition in the two to three years prior to
business failure. In such cases, net work-ing capital fell
by an average of 66% in two years. Thu,s-> a multiple of six
(a factor of two - to ensure ability to pay - times three -
to protect against rapid deterioration) was found necessary.
The second alternative, the "bond rating" test, is not
directly comparable to the "ratios" test. While both options
provide EPA with the needed assurance, they do it in different
ways. While the "ratios" are designed as predictors of bank-
ruptcy, the "bond rating" assures viability and credit-worthiness^
In fact, both Moody' s and Standard and Poor's look at many factors,-,
including ratios, in assigning a rating. For example, they
consider a firm's size to be very important. Most firms assigned
investment grade bond ratings have net worth in the S100 million
to $200 million range and above. Firms which pass the "bond
rating" test are able to raise money easily, and they have a
statistically lower business failure rate than those that pass
the "ratios" test. >'-
It is important to note that over 90% of those firms wishing
to use the financial test are able to pass it. I can certainly
understand the frustration of those unable to use the test, but
believe that our requirements are appropriate to meet our over-
riding responsibility to protect human health and the environment..
Sincerely yours,
William D. Ruckelshaus'
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