&EPA
68-01-6425
REGULATORY AGENCY'S REFERENCE MANUAL
FINANCIAL RESPONSIBILITY FOR WELL
PLUGGING AND ABANDONMENT
SUBMITTED TO
DR. JENTAI YANG
OFFICE OF DRINKING WATER
U.S. ENVIRONMENTAL PROTECTION AGENCY
MARCH 1983
BOOZ- ALLEN & HAMILTON, INC.
UNDER THE DIRECTION OF
GERAGHTY & MILLER, INC.
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&EPA —
684)1-6425
REGULATORY AGENCY'S REFERENCE MANUAL
FINANCIAL RESPONSIBILITY FOR WELL
PLUGGING AND ABANDONMENT
SUBMITTED TO
DR. JENTAI YANG
OFFICE OF DRINKING WATER
U.S. ENVIRONMENTAL PROTECTION AGENCY
MARCH 1983
BOOZ-ALLEN & HAMILTON, INC.
UNDER THE DIRECTION OF
GERAGHTY & MILLER, INC.
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AC KNOWLE DGEMENT
This manual was prepared for EPA's Office of Drinking
Water by Booz, Allen & Hamilton, Inc., under the direction of
Geraghty & Miller, Inc. The Booz, Allen project manager was
Dr. Joanne Wyman. Dr. Wyman received assistance from
Mr. John Durkin and Mr. Walter Mardis of Booz, Allen &
Hamilton, Inc. The Geraghty & Miller project manager was
Mr. William Thompson and the EPA task manager was
Mr. Roger Anzzolin.
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TABLE OF CONTENTS
Page
Number
I. INTRODUCTION TO THE MANUAL
1. Regulatory Requirements
2. Organization of the Manual
II. MECHANISMS FOR DEMONSTRATING FINANCIAL
RESPONSIBILITY
1. Surety Bonds
2. Letters of Credit
3. Trust Funds
4. Escrow Accounts
5. Corporate Financial Test
III. EVALUATION OF FINANCIAL RESPONSIBILITY
DEMONSTRATION
1. Overview of the Evaluation Process
2. Completeness of Application
3. Consistency with State Regulations
4. Effectiveness in Promoting Compliance
5. Implementation Burden
6. Operator Cost
1-1
1-2
1-3
II-l
II-l
II-4
II-7
II-8
II-9
III-l
III-l
III-l
III-4
III-5
III-7
III-9
APPENDIX A - Cost Elements of Alternative Financial
Responsibility Assurance Mechanisms
APPENDIX B - Total Cost of Well Abandonment Using
Alternative Financial Responsibility
Assurance Mechanisms
APPENDIX C - Glossary of Financial Terms
11
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INDEX OF EXHIBITS
Page
Number
II-l Surety Bond Form II-3
II-2 Example of Letter of Credit II-5
II-3 Simplified Financial Statement II-9
II-4 Approaches to Financial Data Analysis 11-11
III-l Comparative Evaluation of Financial III-2
Responsibility Mechanisms
III-2 Overview of Evaluation Process III-3
A Cost Elements of Alternative Financial A-l
Responsibility Mechanisms
B Total Cost of Well Abandonment Using A-2
Alternative Financial Responsibility Mechanisms
in
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I. INTRODUCTION TO THE MANUAL
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I. INTRODUCTION TO THE MANUAL
The Safe Drinking Water Act is designed to protect
underground sources of drinking water (USDW) by regulating the
design, construction, operation and abandonment of underground
injection wells. To achieve this objective, the Act directs
EPA to designate States that require underground injection
control (UIC) programs and to promulgate minimum technical
standards and permitting provisions for State programs. States
that have programs meeting the minimum Federal requirements are
.eligible to have primary enforcement authority (primacy).
Alternatively, States that have existing UIC programs for
regulating oil and gas operations may continue to administer
the programs if their provisions are essentially equivalent to
Federal requirements. In all other cases, EPA will promulgate
and administer a UIC program.
Under regulations which EPA first promulgated in 1980,
program directors must require permittees to plug and abandon
their wells properly according to prescribed technical stan-
dards. To ensure that well owners and operators will be
financially capable of meeting this obligation, the regulations
direct the Program Director to require permittees to provide
evidence of available assets ("financial responsibility").
Some of the financial responsibility mechanisms available to
well owners and operators are:
Surety (performance) bonds
Letters of credit
Trust funds
Escrow accounts
Corporate financial test.
If the state has required demonstration of financial
responsibility in the past, regulators already may be familiar
with some or all of these alternatives.
The purpose of this manual is to assist regulatory agencies
in evaluating a permittee's financial responsibility
demonstration and determining its adequacy. It is designed to
provide useful information both to those with experience in
administering financial responsibility rules and those managing
such a program for the first time. The manual provides a
general introduction to the subject, including:
Background on the regulations
Description of financial responsibility mechanisms
(Chapter II)
1-1
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Guidelines for evaluating an operator's selection of a
mechanism (Chapter III) .
In addition, the manual contains a glossary of financial terms
and information on the comparative costs of financial
responsibility mechanisms.
The remainder of this chapter provides background
information. First, it summarizes the technical and financial
provisions of the regulations. It concludes with an overview
of the organization of the rest of the manual.
1. REGULATORY REQUIREMENTS
Congress created the UIC program in response to evidence
that injection activities could have an adverse impact on the
quality of groundwater. Contamination can result from improper
plugging and abandonment practices. Accordingly, in carrying
out its statutory obligation to establish minimum technical
criteria and standards, EPA issued rules governing the plugging
and abandonment of injection wells in Classes I-III. One set
of rules (40 CFR 146) stipulates plugging and abandonment
methods while the other set (40 CFR 122) directs states to
require permittees to demonstrate that they will have adequate
financial resources to carry out their approved plugging plans.
(1) Technical Criteria and Standards
The objective of the plugging and abandonment
standards is to prevent "the movement of fluids either into
or between underground sources of drinking water." In
order to achieve that objective, well owners and operators
generally must plug their wells with cement, although the
regulatory agency may authorize Class III well operators to
use other plugging materials. Also, prior to placing the
plugs, the operator must achieve a "state of static
equilibrium with the mud weight equalized top to bottom,
either by circulating the mud in the well at least once" or
by another method acceptable to [the Program Director]" (40
CFR 146.10). These requirements are discussed in greater
detail in EPA's Technical Well Abandonment Manual.
Under 40 CFR 122.42 the regulatory agency must require
the operator to prepare a plugging and abandonment plan as
part of the permit application. If the plan is adequate,
it becomes part of the permit. If the plan has
deficiencies, the agency either can ask for revisions or
deny the permit. EPA's reference manual for operators
recommends close consultation with program staff prior to
submittal of an application.
1-2
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(2) Financial Responsibility Requirements
The permitting regulations require permittees to
demonstrate that they have adequate financial resources to
comply with their plugging plans. EPA's rules give the
regulatory agency considerable flexibility in deciding
.which mechanism(s) an individual operator may use to
'demonstrate financial responsibility. The agency also has
the option of requiring a separate financial responsibility
demonstration for each well or allowing a blanket
demonstration covering all of an operator's wells in the
state.
2. ORGANIZATION OF THE MANUAL
The next two chapters of the manual describe five
alternative methods operators could use to satisfy the
financial responsibility requirements. Chapter II describes
the terms and conditions of each alternative. Chapter III
provides a step-by-step outline of how to evaluate the
operator's financial responsibility plan.
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II. MECHANISMS FOR DEMONSTRATING
FINANCIAL RESPONSIBILITY
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II. MECHANISMS FOR DEMONSTRATING
FINANCIAL RESPONSIBILITY
The purpose of the financial responsibility requirement is
to ensure that the regulatory agency or a third party will have
access to adequate funds for plugging in case a well owner or
operator fails to comply with the plugging and abandonment
conditions of his permit. This chapter describes and evaluates
the financial responsibility alternatives which operators may
wish to use.
Several mechanisms, some or all of which may be acceptable
under state laws and regulations, are available to satisfy the
financial responsibility requirement:
Surety bonds
Letters of credit
Trust funds
Escrow accounts
Financial statements.
Historically, these mechanisms have been used to ensure per-
formance of a variety of Federal, State, or local regulatory
obligations. In order to assist regulators in assessing oper-
ators' financial responsibility demonstrations, this section
provides background information on the terms, conditions, and
operation of each mechanism.
1. SURETY BONDS
Surety, or performance, bonding is the most widely used
approach for demonstrating financial responsibility, partic-
ularly in the oil and gas industry. Bonding is a mechanism
whereby a licensed surety company*, in return for an annual fee
paid by the operator, assumes liability for the well operator's
plugging and abandonment obligation. The surety company is not
released from this liability until it receives notification
from the regulatory agency that the operator has adequately
performed his obligation. Under current practice, plugging
bonds written for individual wells cannot be cancelled even if
the operator fails to pay the annual fee; and while
cancellation of a blanket bond relieves the surety from any
liability for additional wells not previ- ously covered, the
surety is still responsible for wells already covered.
Over 300 surety companies are certified by the U.S.
Treasury for bonding under Federal programs (see U.S.
Treasury Department Circular 570), and others are licensed
by the states.
II-l
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In the event the operator fails to perform, the surety
company is responsible for promoting proper plugging and
abandonment. Depending on state law and regulation, a bond is
written either to provide a beneficiary (e.g., the regulatory
agency) with funds to carry out plugging or to specify that the
surety company itself will arrange for plugging. Surety com-
panies often prefer to have a choice, since the actual cost of
plugging may be less than the estimated cost upon which the
bond value was established. Both approaches relieve the regu-
latory agency of either having to provide plugging funds or
take enforcement action to recover plugging costs from the
operator.
(1) Types of Bonds
Surety companies currently offer two types of plugging
bonds. The most widely used is the blanket bond, which
covers all of an operator's wells within a single state.
Bonds may also be written for individual wells. In the
past, the regulations of each state have dictated the type
and value of the bond required. Exhibit II-l shows the
surety bond form which has been used in Oklahoma. It is
similar to forms used in other states.
(2) Bonding Procedures
The procedures for obtaining a plugging bond are well
established, and both operators and regulators find
bonding a simple mechanism to use. After an operator
requests a bond, the surety company conducts a thorough
evaluation of the operator's financial health. If the
operator's financial status is clear, the underwriter
either will write or decline the bond. In borderline
cases, the surety company may require collateral. Once the
bond is written, the surety company sends evidence of the
bond to the appropriate regulatory agency . Thus, bonding
relieves the agency of the need to conduct a special
financial evaluation of the permit applicant or to track
the permittee's continuing financial responsibility.
(3) Cost of Bonds
All operators must pay an annual premium, which typi-
cally ranges from 1..0 to 1.5 percent of the face value of
the bond. The cost of a blanket bond may range up to
5 percent and there may be an added charge for each new
well. Exact rates generally are filed with and approved by
state insurance commissions. While surety companies cannot
impose surcharges on financially weak companies, they often
provide healthier companies with discounts.
Costs to well operators may be considerably higher if
the surety company requires collateral. Surety companies
II-2
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EXHIBIT II-l
Surety Bond Form
OKLAHOMA CORPORATION COMMISSION
CONSERVATION DIVISION
310 Jim Thorpe Building
Oklahoma Cllj, Oklahoma Ml0.1
SURETY BOND FOR PLUGGING OIL, GAS AND
SERVICE WELLS WITHIN THE STATE OF OKLAHOMA
KNOW ALL MEN BY THESE PRESENTS:
as Principal.
Mailing Address.
. Zip Code.
And That . as Surely,
Mailing Address
. Zip Code.
authorized to do business within the Slate of Oklahoma are held and firmly bound unto said Slate in the penal sum
of Ten Thousand Dollars (SIO.OOO). lawful money of the United State*, for which payment well and truly to be made,
we bind ourselves, and each of us. and each of our heirs, executors, administrators or successors, and assigns jointly
and severally, firmly by these presents.
The condition of this obligation is that whereas the above bounden principal proposes to drill and/or operate in
oil, gas. injection, disposal or service well or wells within the Slate of Oklahoma, and has furnished his agreement in
writing to the Corporation Commission of the State of Oklahoma to plug each such well at the time und in the manner
prescribed by the laws of the Slate ol Oklahoma and the General Rules and Regulations and Special Orders of the
Commission.
NOW.'THEREFORE, if the above bounden principal shall plug each well drilled and/or operated by him within
the Slate of Oklahoma at the lime and in the manner prescribed by the laws of the Stale of Oklahoma and the Gen-
eral Rules and Regulations and Special Orders of the Corporation Cmimi>sion of the State of Oklahoma, then this
obligation shall be null and void; otherwise, the same shall be and remain in full force and effect. This obligation
~may be terminated by the Surety upon six (6) months notice in writing to the Conservation Division. (OCC Rule
3-201: 52 OS Supp 1971 §319.)
PROVIDED, HOWEVER, the aggregate liability of the surety hcrcundcr shall in no event exceed the sum of
this bond.
Witness our hands and seals, this day of .
Witness our hands and seals, this Jay of
COUNTERSIGNED BY:
OcfuAuma Kniitrnl Srrviee Agtnl .lately
(If the principal is a corporation, the bond should be executed by its duly authorized officers, with the seal of the
corporation affixed. When principal or surety executes this bond by agent or attorney in fact, the evidence of author-
ity must accompany the bond.)
Approved Date:-
Cumsermiun Uiviiion — Ofc/OAOna Corporation I'omaumuft
II-3
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are very cautious and, unlike liability insurers,
theoretically assume no risk. Thus, if the surety company
considers a company's financial position to be at all
uncertain, the surety will ask for collateral equal to all
or part of the bond's face value. Collateral generally
consists of treasury bills, cash, certificates of deposit,
government secured general obligation or revenue bonds, or
an irrevocable letter of credit. The additional cost of
collateral is that some of the operator's capital is tied
up in low yield investments and not available for higher
yield investments.
(4) Drawdown of Funds
If the UIC program is administered by EPA, a permittee
should establish a stand-by trust when obtaining a
performance bond. The terms of the bond would provide that
in case the operator defaults, all payments under the bond
would be deposited directly into the stand-by trust.
Without such a depository mechanism, any funds drawn under
this mechanism, payable to the Regional Administrator would
have to be paid into the U.S. Treasury and could not be
designated specifically to pay for plugging.
2. LETTERS OF CREDIT
An irrevocable letter of credit (LOG) is a less widely used
approach but one which is advantageous both to some large
companies and to regulatory officials. As applied to plugging
obligations, it is an irrevocable assurance, usually provided
by a bank, to pay the beneficiary (i.e., a state agency) up to
a certain sum if the operator fails to perform. In other
words, if the operator fails to perform, the agency would be
able to draw funds from the bank upon the presentation of
documents consistent with the terms of the letter of credit.
Exhibit II-2 presents the form currently used in Oklahoma for
letters of credit. As with surety bonds, if EPA administers
the UIC program, the permitee also should establish stand-by
trust funds to serve as the depository mechanism for drawdowns
on the LOG.
The availability and cost of the letter of credit may vary
according to the operator's financial status, relationship with
the issuing institution, value of the LOG, and the issuing
institution's outstanding loans. Letters of credit typically
are available only to large companies with a substantial,
verifiable net worth. Banking industry representatives suggest
that large oil companies will find LOC's easy to obtain,
whereas firms with less identifiable assets or with only
limited operating histories may face greater difficulties.
Blue chip firms (with a AAA rating) having an established
relationship with the issuing bank may pay an annual fee of no
II-4
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EXHIBIT II-2
Letter of Credit
FORM NO. 1006C 11975) RULE 3-291.4
OXLAJKItt OORFORATiat CCMOSSICtl
DIVISION
IRJEVOCABLE COMOCLM. LETTER OP CKHHT
DME:
TO: Corporation Camlsslcn of the State of Cklahora,
Third Floor, Jim Thorpe Bulldlnc,
dclafOTU City. Ckla.'win 73105
Gentlemen:
Uc hereby authorize you to draw on
None oj Bant
SCueX Mditu
by order of
r^ fti i£4f t 2^p
Moot oj Upe/uilM
SZ33Z
and for account or
up to an amunt not exceedlriQ ten Thousand Dalian ($10.000) available by your drafts
on ourselves at sl£it for 1001 Invoice cost accompanied by a forral order of the
Corporation Connusslon of the State of Qclahona entered pursuant to and In aid of
U«r enforcercnt of Cotnlsslon Rule 3-201 and 53 O.S. 1971 $318.1 and as the rule or
statute eay be anended.
This Letter of Credit will expire midnight on the _ day of _ , 19 _
or when the next succeeding Letter of Qredlc la furnished to the Ccnzntaslon , uhlchewr
occurs first. In no event will the obligations of nultlple Letters of Credit securing
the saire Operators Agreement be cunulatlve or In excess of the total ajsgrcgate sum
of tlO.OOO.
Vie hereby agree with the drawers, endorsers and bona fide holders of ail drafts
draim under and In corpllance tilth the terra of t!Ua Letter of Credit that such drafts
will be *>iy honored upon presentation to the drawee.
Tours very truly,
?\uidtnt •
C
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more than .25 percent of the full value of the LOG annually,
although the cost can be as high as one percent. An additional
cost to operators is that the LOG counts against the firm's
credit line and reduces its access to capital for expansion or
investments. In some cases, the bank may require up to 100
percent collateral, applying the same terms to an LOG as to an
outright loan. If collateral is required, the cost will rise
considerably. Although Federal regulations limit the amount of
credit a lending institution can make to any one company, this
should not be a problem for injection well operators since the
costs of plugging typically are relatively modest.
3. TRUST FUNDS
A trust fund is an arrangement whereby the operator
deposits sufficient funds for regulatory compliance with an
independent trustee. The trustee then bears legal responsi-
bility for managing the fund for the benefit of the regulatory
authority in accordance with the designated terms of the
trust. These terms may specify investment procedures as well
as eventual disposition of the funds for plugging and abandon-
ment. The operator pays the trustee a management fee that is
generally a percentage of the size of the trust and varies with
the duties of the trustee.
Once established, the operator cannot terminate the trust
fund without the consent of both the trustee and the benefici-
ary, in this case the regulatory authority. Trust funds -are
widely used to isolate funds for government mandated programs,
and are included as an option for financial responsibility
assurance for EPA's hazardous waste program.
(1) Types of Funds
Well owners and operators may establish a fund either
individually or as part of an industry group. All aspects
of the trust such as costs, fund management, and fund
disbursement can vary and are defined in the trust agree-
ment. The trust agreement will set forth the trustee's
role and any limitations on his investment of the trust
funds. The objective, for both individual and industry
trusts, is to make investments which at least keep up w,ith,
and even exceed, inflation. Trust funds intended for
assuring regulatory compliance generally limit investments
to low risk securities such as U.S. Treasury bills. This
assures that the funds are available for their regulatory
purpose and not lost through speculation.
The regulatory agency may stipulate in advance the
trust terms that it would find acceptable. EPA has not
established such terms in the UIC rules and intends to
leave that task up to each Program Director.
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(2) Cost of Establishing Trust Fund
The cost of a trust fund may vary according to the
management fees, payment schedule, and whether the trust is
an individual or industry fund. Typical annual management
fees run about 1.0 to 1.5 percent of the value of the
trust.
In establishing an individual trust, the operator
generally can choose from two different payment methods.
The terms of the agreement either may require a lump sum
payment upon establishment of the trust or may allow an
annual payment into the fund.
Although the latter approach considerably lightens the
operator's financial burden by spreading payments over a
number of years, it provides less assurance that sufficient
plugging funds will be available when needed. For example,
if the operator goes bankrupt or ceases his operations
prematurely and fails to comply with his plugging plan, the
size of the trust fund may not be sufficient to make ade-
quate plugging funds available to the agency. By contrast,
a lump sum payment at the outset assures the availability
of funds regardless of when or why the operator shuts down
his well.
Despite the potential risks, regulatory agencies need
not categorically prohibit the use of annual payment
trusts. Instead, the agency could pursue options such as
initially requiring a surety bond and gradually reducing
its value as the amount in a trust fund rose.
For industry-wide trusts, the payment schedule is
always an annual one dictated by the number of participants
and anticipated rate of noncompliance. These assessments
are likely to be lower than those to an individual trust
fund, since the probability of noncompliance for all wells
covered by the fund is considerably less than that for any
single well. Industry trust assessments are non-
refundable, however; funds are available only if the
operator fails to perform.
4. ESCROW ACCOUNTS
An escrow account, like a trust fund, is an account into
which the operator deposits sufficient funds in advance to pay
for proper plugging and abandonment. The funds may be
deposited in full upon establishment of the escrow or over any
stipulated period during the life of the well, and are dis-
bursed to the operator either as payment for abandonment or
reimbursement for completion of his responsibilities. The
funds may be used only to meet the costs of abandonment. An
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account administrator verifies deposits and disbursements.
Typically, the account administrator is a financial institution
or other independent third party, for whose services the oper-
ator pays an annual management fee on the order of one percent
of the value of the account. Alternatively, the regulatory
agency may administer the account if it is willing to undertake
the increased administrative burden and has the authority to do
so.
Unlike a trust fund, which transfers legal title for the
funds to the trustee and requires him to protect the interests
of the beneficiary, the escrow account administrator is respon-
sible only for specifying the terms of the escrow agreement and
for administering the account accordingly. The operator retains
legal title to the funds, and unless prohibited by the terms of
the escrow agreement, may use the funds for abandonment. The
operator's maintenance of title also implies that, in the event
of operator bankruptcy, the funds may be subject to creditors'
claims. Because it is difficult to draft an escrow agreement
that addresses all of these contingencies, escrow accounts have
not been allowed as a financial responsibility assurance
mechanism for some other regulatory programs, including EPA's
hazardous waste program. Program Directors should be
especially alert to the potential shortcomings of escrow
accounts as a means for guaranteeing financial responsibility.
5. CORPORATE FINANCIAL TEST
A financial statement summarizes an operator's current
financial status. It indicates liquidity and stability but
does not guarantee that the operator will have adequate finan-
cial resources for abandonment in the future. Most financial
analysts agree that the data the operator is likely to submit
will not be useful in predicting a firm's financial health more
than three years into the future.
Presumably, a regulatory agency would use extreme care in
accepting a financial statement from an operator as evidence of
financial responsibility, since the operator does not have to
set aside funds for abandonment. Thus, the acceptability of a
financial statement depends upon whether the regulatory agency
is confident that a relationship exists between the operator's
current assets and his future willingness and ability to fulfil
regulatory obligations.
(1) Types of Financial Data
Exhibit II-3 displays a simple financial statement
required of permittees in Oklahoma. Essentially it is a
balance sheet presenting the permittee's total accumulated
assets and liabilities at the end of a particular period,
indicating the operator's net worth and liquidity. To
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EXHIBIT II-3
Example of Financial Statement
^10"* OKLAHOMA CORPORATION COMMISSION
CONSERVATION DIVISION
m Jba Tbocp. Biuldlflf
OKLAHOMA CITY. OIOHOMA HI05
FINANCIAL STATEMENT
Thai Operator.
Muling
.Zip Code_
hereby attests thai he hu a total net worth of * The description and value of uuu and
liabilities are u shown below. A tutement reflecting a net worth of leu than 510.000.00 a not acceptable and
partial Financial Statements will be returned to the operator. If Accounts Receivable are listed, they mult be
accompanied by a statement attached and made a part hereof of the dollar amount of delinquent accounts. The
value of producing oil and gas leaseholds Tor which this iiatement stands ai security, will be deducted from
total net worth unless the Financial Statement is accompanied by the written appraisal of a recognized indepen-
dent appraiser of oil and gu properties showing the fair market value of the leasehold interest owned by the
operator.
ASSETS LIABILITIES
Total Net Worth S_
I. the underlined, being duly sworn upon oath, slate that ihis Financial Statement is a true and full Hate-
nent of asicu and liabilities.
Sfnuun rOotniori
Title
Subscribed and sworn 10 before me ""« •<-•• of_
My Commission
11-10
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EXHIBIT II-4
Approaches to Financial Data Analysis
Type of Measure
Description
Advantage/
Disadvantage
Data Sources
Ability to Fiannce
Obligations
Cross measures of size
- Net worth (or stockholder's
equity)
- Total assets
Large firms have more assets
and lower probability of
bankruptcy
Easy to read directly
from balance sheet
Balance sheet
Dependence on
Creditors
Extent to which operator
relies on debt financing
Highly leveraged firms usually
are more vulnerable, but it
depends upon cash flow
stability
Requires calculation of
several ratios:
- Total debt/total assets
- Total debt/net worth
- Long term debt/capital-
ization
- Long term debt/net worth
Necessitates trend analysis
(including cash flow
volatility)
Balance sheet
Statement of sources
and uses of funds
Liquidity
Adequacy of assets to meet
obligations as they come
due
Requires calculation of
several ratios:
- Current ratio (current
assets/current liabil-
ities)
- Quick ratio (cash +
current receivables +
marketable securities/
current liabilities)
- Necessitates comparison
with other firms
Balance sheet
Type of Analysis
Common Size
Measures
Trend Analysis
Description
Compares permittee's financial
performance with other firms
.of a similar asset size, in
the same industry
Ascertains positive/negative
trends in permittee's financial
position over several years
Advantages/
Disadvantages
Not comprehensive
Proper interpretation
requires familiarity
with economic cycles,
indus try- specific
factors and their
impact on individual
operators
Data Sources
. Annual surveys (e.g.,
Robert Morris Associates,
Annual Statement Studies;
Troy Leo, Alamanac of
Business and Industrial
Financial Ratios
. Computerized services
(e.g. , Compustat)
Financial statements for
multiple years
11-11
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ensure a more reliable estimate of the operator's financial
condition, the regulatory agency may want to require a
considerably greater amount of data such as that found in
the following additional tables:
Income statement
Statement of sources and uses of funds
Accumulated retained earnings statement.
The income statement presents the firm's revenues, expendi-
tures, and profits for the preceding year. It is thus a
record of the operating activities for that year. The
statement of sources and uses of funds breaks down infor-
mation from the income statement and balance sheet to show
the firm's income sources, including operation income and
sale of assets, the uses to which this cash was applied,
and the resulting net change in working capital, or net
current assets. This may be followed by an analysis of
changes in net working capital for the reporting period,
describing changes in current assets and current
liabilities. Finally, the accumulated retained earnings
statement indicates how much of the firm's profit for the
year was retained for reinvestment and new growth after
payment of stockholders' dividends.
(2) Interpretation of Data
The income statement, balance sheet, and statement of
sources and uses of funds are likely to be the most useful
parts of the financial statement for analyzing an operator's
ability to meet well plugging and abandonment requirements.
Income statement and balance sheet data are generally
provided for two or more years, allowing analysis of trends
in the firm's financial performance. Cash flow analysis
based on the statement of sources and uses of funds has
become recognized as a valuable tool for interpreting the
data in the income statement and balance sheet.* The
agency may choose from among several available measures of
financial health. Some of these may be read directly from
the balance sheet, while others are best interpreted in
ratio form from information contained in the balance sheet,
income statement, and statement of sources and uses of
funds. Unfortunately, no single measure or set of measures
can be regarded as best in all cases, nor can specific
threshold values be established as meaningful indicators of
good financial health for firms of all sizes in different
industries and circumstances.
A useful introduction to cash flow analysis can be found in
Techniques of Financial Analysis by Erich Helfert, DBA,
Fourth Edition, 1977, Chapter 1.
11-12
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Exhibit II-4 summarizes several different approaches
that may be used in analyzing the operator's financial
data. Although other indicators of financial health are
available, these are perhaps the most commonly used and
have been successfully employed in other Federal regulatory
programs. It should be clear from the preceding discus-
sion, however, that no standard values can be relied upon
to discern the healthy from the unhealthy firm. It is up
to the regulatory agency to specify the conditions under
which financial statements are acceptable as a demonstra-
tion of financial responsibility.
(3) Cost of Financial Statement Preparation
From the operator's perspective, submittal of a finan-
cial statement is the simplest method of demonstrating
financial responsibility and involves a negligible incre-
mental cost. Federal securities regulations require that
all publicly-held companies submit a complete set of
financial statements in their annual 10-K report to the
Securities and Exchange Commission, although these may be
presented in consolidated form for all operations of a
conglomerate. Most private companies prepare comprehensive
financial statements for their own purposes, and hence
would incur a very limited incremental cost.
The five financial assurance mechanisms discussed
above are those that have been in most widespread use prior
to the promulgation of Federal UIC rules. Program
Directors are neither required to allow all of these
mechansims nor prohibited from using other ones.
The five financial assurance mechanisms discussed above are
those that have been in most widespread use prior to the promulga-
tion of Federal UIC rules. Program Directors are neither required
to allow all of these mechanisms nor prohibited from using other
ones.
11-13
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III. EVALUATION OF FINANCIAL
RESPONSIBILITY DEMONSTRATION
-------
III. EVALUATION OF FINANCIAL REPONSIBILITY DEMONSTRATION
The guidelines in this chapter are not meant to recommend
which financial responsibility mechanisms should be accepted in
all cases. Each case will have unique characteristics, and the
agency should evaluate the operator's financial responsibility
demonstration against program objectives. The purpose of these
guidelines is to outline an approach that can be used to assess
the financial responsibility portion of an application.
The agency's assessment of the adequacy of an applicant's
selection of a financial responsibility mechanism should
reflect three factors:
Consistency with regulations of regulatory agency
Effectiveness in promoting compliance
Administrative burden.
The agency should be sensitive to the relative costs of finan-
cial responsibility mechanisms to the operator, as cost is one
of the most important factors in the operator's choice of a
mechanism. Following a brief overview of the evaluation
process is a discussion of each of the evaluation criteria.
1. OVERVIEW OF THE EVALUATION PROCESS
EPA's financial responsibility rules are designed to
promote proper plugging and abandonment without placing unrea-
sonably high compliance costs on operators or administrative
burdens on regulatory officials. To promote these objectives,
the rules neither prescribe nor preclude the use of specific
mechanisms; rather, they give Program Directors responsibility
for determining which financial responsibility mechanisms are
acceptable. Exhibit III-l presents a summary evaluation of the
five mechanisms considered in this manual.
Exhibit III-2 provides an overview of general procedures to
be followed in evaluating financial responsibility demonstra-
tions. Consistent use of these or other similar procedures can
promote a smooth, efficient permitting process by disseminating
permitting information to applicants.
2. COMPLETENESS OF APPLICATION
The type and amount of information required of applicants
will vary according to the financial responsibility mechanism
the applicant has chosen. In any case, the agency cannot
III-l
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EXHIBIT III-l
Comparative Evaluation of Financial
Responsibility Mechanisms
Consistency with
State Regulations
Effectiveness
Administrative
Burden
Surety Bonds
Generally accepted in
most states
Most effective because funding
mechanism guaranteed. Surety
company typically takes full
responsibility for abandonment
needs in cases of nonperformance.
Mininal burden since
.surety company performs
all of the work.
Letters of
Credit
Varies
Since funds are specifically
guaranteed to be available,
LOC's should generally prove
adequate.
State may have to verify
soundness of LOG and
ensure it remains
updated.
H
M
I
ro
Trust Funds
Varies
As long as they are properly
administered they should be
effective. Most suitable when
needed funds are deposited at
beginning of well operation
rather than incrementally.
State will have to
monitor payments to
funds and the legal
standing of fund.
Escrow
Accounts
Often not acceptable
Less certain than trust funds
because creditors may have access
to funds in escrow account if
operator goes bankrupt.
Lack of guarantees
associated with an
escrow account could
require that the state
would have to continually
monitor account operation.
Financial
Statements
Varies; stringent
criteria often
applied
Provides no direct financial
assurances. Best used as
an indication of when some
other mechanism may be needed
Regular oversight of
statements by qualified
analysts is essential.
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EXHIBIT III-2
Overview of Evaluation Process
AGENCY
REQUESTS
MORE DATA
APPLICANT
SUBMITS FINANCIAL
DEMONSTRATION
NO/
DENIES OR REQUESTS
ALTERNATIVE
APPROVES
DEMONSTRATION
III-3
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evaluate the adequacy of a financial responsibility demonstra-
tion unless it is complete. Information typically needed for
each mechanism includes:
Surety bond; a properly executed bond which clearly
identifies the bond's value, number and classes of
wells covered, obligation to pay or perform, and name
of surety company.
Letter of credit (LOG); a letter or other form from
the issuing bank identifying the letter of credit
number and value, verification of regulatory agency as
beneficiary, effective and expiration dates, and
conditions for drawdown of the LOG.
Trust funds; a copy of the trust agreement identi-
fying the trustee, the payment schedule, the allowable
investments, and conditions for terminating the fund
and releasing its assets.
Escrow accounts! a copy of the escrow agreement
specifying the account administrator, deposit sched-
ule, allowable investments, and conditions for termin-
ating account and releasing assets.
Financial statement; a summary of the applicant's
financial status including income statement, balance
sheet, statement of sources and uses of funds, and
accumulated retained earnings statement
To promote a streamlined permitting process, the agency should
provide applicants with a checklist for determining
completeness.
3. CONSISTENCY WITH STATE REGULATIONS
The agency should ascertain that the applicant has selected
a mechanism allowed under the laws and regulations governing
the administering agency. Although EPA has not restricted the
use of any of the five mechanisms discussed in Chapter II, it
has not prohibited Program Directors from doing so. In fact,
some programs already restrict operators to using surety bonds
or depositing cash or securities with the state treasurer. If
the operator has selected a mechanism expressly forbidden by
Federal or state regulations, the agency should notify the
operator in writing that he must amend the financial
responsibility portion of his application. Alternatively, the
agency may wish to consider other mechanisms not considered in
this manual, in which case the Program Director should be
prepared to request specific information needed for evalu-
ation. If prevailing regulations require the agency to
III-4
-------
render a permit decision within a specified period, the agency
can comply with that requirement at this point by phrasing the
letter to the applicant either as a permit denial or as a
request for additional information. Currently, in most states,
requests for more data "stop the clock."
Many Program Directors either have or may wish to adopt
special conditions associated with the use of one or more of
the financial responsibility mechanisms. Typical examples of
such restrictions include:
Size of companies allowed to use financial statements
Specified duration or value of surety bonds
Mandatory collateral with financial statements
Designation of a governmental agency as escrow
administrator.
Some of these restrictions may be explicit in state or Federal
laws or regulations, in which case the agency should include
them in its legal review of the operator's application.
Alternatively, such restrictions may be treated as operating
guidelines, applied on a case by case basis. In that event,
the application should be evaluated against any special
restrictions or conditions subsequent to the completion of the
legal review. in either event, the agency should disseminate
them to operators before applications are prepared. As men-
tioned earlier, the permitting process can operate most expedi-
ently when applicants seek and the agency is prepared to give
pre-application assistance. This type of permittee/ regulatory
agency interaction will be particularly essential if the finan-
cial responsibility rules represent a new program area for the
agency.
4. EFFECTIVENESS IN PROMOTING COMPLIANCE
Unless the regulations require all applicants to use the
same financial responsibility mechanism, applicants may select
different mechanisms; and the next step is to consider whether
the operator's selection of a mechanism sufficiently addresses
the principal objective of ensuring proper plugging and aban-
donment. The agency should look particularly favorably on
mechanisms which make plugging funds available to the operator
to comply with his permit or to the agency or a third party in
case of the operator's nonperformance.
(1) Surety Bonds
Surety bonds are the most effective of the five finan-
cial mechanisms considered here for promoting proper well
plugging and abandonment. The availability of funds is
guaranteed by the surety company, which assumes responsi-
bility should the operator fail to perform. In contrast to
trust funds and escrow accounts, the availability of funds
III-5
-------
is not dependent upon establishment and maintenance of an
independent account. As long as the surety company remains
financially viable, it is legally obligated to assume
responsibility according to the terms of the agreement. If
performance of compliance activities rather than payment of
the face value of the bond is required by the agreement,
this mechanism guarantees not only the availability of
funds but the completion of 'proper abandonment procedures
as well.
(2) Letters of Credit
Letters of credit provide almost as much assurance for
the regulatory agency as surety bonds. If the operator
fails to comply with the plugging conditions of his permit,
the agency can present documentation to the bank enabling
it to draw against the operator's line of credit in order
to obtain funds for abandonment. In contrast to surety
bonds, a letter of credit always requires the agency to
oversee plugging and abandonment.
(3) Trust Funds and Escrow Accounts
Both trust funds and escrow accounts offer an advan-
tage in that they isolate funds specifically intended for
abandonment in advance, when the operator's financial
interest in the well is greatest. These funds are avail-
able for use when his interest in the well is lowest, i.e.,
when the useful life of the well is exhausted. Assurance
of the availability of funds is greatest if the entire cost
of abandonment is deposited in the account at the time the
well is drilled. Annual deposits ease the operator's
financial burden but increase the risk that the account
will never be filled, since the well may be abandoned when
annual profits fall below the amount of his annual deposits
to the account.
Despite their similar approach to isolating funds for
compliance, trust funds are superior to escrow accounts in
that legal title to the trust fund is assumed by the bene-
ficiary (i.e., the regulatory agency), preventing the
operator from revoking the trust. The agreement generally
specifies that funds are to be released to the operator
only after plugging is complete. If the size of an indi-
vidual operator's fund is greater than the actual cost of
abandonment, holding the funds until after abandonment is
complete imposes an additional incentive on the operator to
comply. In case of nonperformance, the funds are payable
to the agency. Thus, eventual availability and use of the
funds is assured. In the meantime, the trustee is obli-
gated to invest the funds in the beneficiary's interest.
III-6
-------
In contrast to an individual trust fund, an industry
trust fund encourages compliance by reducing the size of
assessments in return for a high industry compliance rate,
and thus promotes industry policing of individual opera-
tors. Should the noncompliance rate exceed its anticipated
level, however, sufficient funds may not be available in
the industry trust in any given year. For this reason,
industry trusts may have selective memberships to avoid
subsidizing unreliable operators by their financially sound
associates.
Escrow accounts, like trust funds, isolate funds for
abandonment in advance, assuring their availability for
compliance with technical standards. The operator retains
legal title to funds in escrow, however, and may initiate
their use for abandonment, subject to verification of
performance by the account administrator. The agency
therefore is likely to have less control over the contents
of an escrow account than a trust fund unless the agency is
the escrow administrator.
(4) Financial Statements
Financial means tests, as portrayed via the operator's
financial statements, provide the least assurance of proper
abandonment afforded by the five mechanisms considered
here. While operator financial health serves as an indi-
cator of impending bankruptcy and hence warns of the need
to establish a more dependable financial responsibility
assurance mechanism, it provides no direct guarantee of
performance other than for maintenance of a good relation-
ship with the state agency in order to be able to continue
using this low-cost mechanism. No funds are set aside for
compliance and no responsible third party stands ready to
assume financial responsibility should the operator fail to
perform. The agency is likely to bear the technical and
financial burden of plugging and abandonment in the event
the operator does not fulfill his plugging obligations.
Because of the lack of compliance guarantees associated
with financial means tests, the agency may want to screen
out potentially unreliable operators, and to require oper-
ators to establish alternative mechanisms should their
financial condition begin to deteriorate.
5. IMPLEMENTATION BURDEN
The agency should take care not to authorize a financial
responsibility mechanism that would impose on itself an undue
administrative burden, but should also be sensitive to the
burden imposed on operators. in some cases, the alternative
least burdensome to the agency may be the most burdensome to
the operator.
III-7
-------
(1) Surety Bonds
The implementation requirements of the five financial
responsibility mechanisms considered here vary widely.
Surety bonds are considerably easier for the agency to
implement than most other financial responsibility alterna-
tives. Most states which have well operations also have
surety bond requirements which predate the Federal UIC
rules. Since the surety company conducts the requisite
financial analysis, issues the bond, and notifies the
agency of any change of status, this mechanism imposes no
significant demand on the agency's technical or manpower
resources.
(2) Letters of Credit
Letters of credit may place a greater but not substan-
tial burden on the regulatory agency's resources. Unlike
surety bonds, under which the surety company often carries
out the plugging in the case of an operator's noncompli-
ance, letters of credit place responsibility for plugging
upon the regulatory agency. The agency, rather than a
third party, has the burden of trying to recover costs from
the non-performing operator.
(3) Trust Funds
The implementation burden of trust funds depends on
the type of trust and its specific terms. The agency will
have to monitor deposits to an individual trust or payment
of annual assessments to an industry trust to assure that
funds are being made available. Although the financial
burden to the operator is somewhat greater, the agency may
prefer to require a lump-sum deposit since it provides a
better guarantee of the availability of funds. With regard
to industry trusts, the agency will have to certify compli-
ance rates and determine the appropriate size of assess-
ments as well as monitor their payment by operators.
(4) Escrow Accounts
The use of escrow accounts to demonstrate financial
responsibility may prove cumbersome for the agency without
offering specific advantages beyond those of a trust fund.
In addition to giving less control to the regulatory
agency, escrow accounts must be monitored more closely than
trust funds. In the event of operator bankruptcy the funds
in escrow may be legally subject to creditors' claims,
endangering their availability for well plugging and
abandonment.
III-8
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(5) Financial Statements
The use of financial statements to demonstrate finan-
cial responsibility poses significant administrative prob-
lems for the agency. Assuming that meaningful financial
tests could be devised and applied to all operators, the
agency may have neither sufficient manpower nor technical
expertise to evaluate and periodically monitor operators'
financial status. In addition to burdening agency
resources, reliance upon faulty financial analysis may
defeat the purpose of financial responsibility requirements
by certifying financially unqualified operators and expos-
ing the agency to unnecessary risk if the operator fails to
perform.
6. OPERATOR COST
While the regulatory agency's principal objective is to
promote proper abandonment without draining its resources, it
should be sensitive to the operator's costs of compliance.
Cost is typically the most important decision criterion the
operator applies to the range of available alternatives. Cost
considerations include not only the fees (such as premiums or
management fees) and opportunity costs of capital but also
whether the alternative provides the actual abandonment funds
or a post-closure reimbursement.
The cost of a given financial responsibility assurance
mechanism varies with the terms of the agreement, the amount of
collateral required, and the difference between the rate of
interest received on invested collateral and the rate obtain-
able from alternative investments. Because small, independent
operators are unlikely to qualify for the best terms, their
costs are likely to be the highest, as is the impact relative
to their resources. Nevertheless, while the cost of the
mechanism is their main consideration in choosing among alter-
natives, well operators indicate that the burden of demonstrat-
ing financial responsibility is rarely prohibitive. The cost
element of the five mechanisms considered here are summarized
and compared in the appendix.
(1) Financial Statement
Reliance upon financial means tests, demonstrated via
the operators' financial statements, is undeniably the
least-cost method of assuring financial responsibility.
Because most companies routinely prepare a complete set of
financial statements and because no capital is tied up in
the process, the incremental cost of submitting financial
statements is likely to be negligible.
III-9
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(2) Letter of Credit
Another fairly low-cost approach is the letter of
credit. The operator sets aside no funds to pay for
closure, and thus incurs only administrative costs.
Operators who are favored customers of the issuing institu-
tion are likely to pay an annual management fee of only one
quarter of one percent of the value of the letter of
credit. However, an indirect cost is that less credit is
available for expansion or other investment.
(3) Surety Bond
Bonding is incrementally more expensive than financial
statement preparation and letters of credit, but generally
less expensive than trust funds or escrow accounts. The
total cost of the bond may vary with the terms, collateral
required, and coverage of the bond. For operators with
multiple operations, the average cost per well is likely to
be lower if a blanket bond is obtained. Because many
operators are already familiar with the bonding process and
are organized to take advantage of bonding, they are often
resistant to alternative mechanisms.
Bonding is available to most applicants upon payment
of an annual premium of 1.0 to 1.5 percent of the face
value of the bond, although small or financially weak
operators may be required to post collateral in the form of
cash, certificates of deposit, or a bank letter of credit.
The surety company retains this collateral until abandon-
ment is completed. If a letter of credit is accepted as
collateral, the operator must pay an additional 1.0-1.5
percent to the issuing bank, although this may be heavily
discounted for large customers. For other forms of colla-
teral, the operator incurs an opportunity cost equal to the
difference between any return on invested collateral and
the return he could otherwise obtain by investing it
himself.
(4) Trust Fund or Escrow Account
The cost of a trust fund or escrow account is similar
to that of a surety bond backed by interest-bearing colla-
teral, assuming that the annual administration fees and
return on investment of the funds are similar to that of
the surety bond and that the funds are deposited as a
lump-sum upon establishment of the account. If the account
is accumulated over the life of the well through annual
deposits, the operator has greater use of the funds for
alternative investment. In that case, the cost would be
lower than that of a surety bond with collateral, which
generally is posted at the time the bond is secured.
111-10
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While each of the alternatives discussed above has advan-
tages and disadvantages, surety bonds guaranteeing performance
appear to be the most consistent with EPA's objectives of
proper well abandonment and minimizing cost to the operator and
administrative burden to the regulatory agency. Letters of
credit offer low cost to the operator, but potentially greater
agency responsibility should the operator fail to perform.
Trust funds offer an attractive alternative for operators who
cannot obtain a bond even with collateral. Escrow accounts
offer similar advantages, but are relatively unattractive to
the agency compared to trust funds and serve no additional
useful purpose. Submission of financial statements is likely
to be the most popular alternative with operators, but does not
assure compliance and should be considered only if meaningful
financial tests can be devised to guarantee that unreliable
operators are excluded.
III-ll
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APPENDIX A
-------
EXHIBIT A-l
Cost Elements of Alternative
Financial Responsibility Assurance Mechanisms
Financial
Instrument
Description of Cost Elements
Cost Discounting
Equation
Financial
Statement
Costs of abandonment incurred by operator when well is
abandoned. Total cost equals present value of abandonment
costs discounted at operator's real cost of capital.
Preparation of statement involves no incremental cost.
TC
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APPENDIX B
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EXHIBIT B-l
Total Cost of Well Abandonment
Using Alternative Financial Responsibility
Assurance Mechanisms (1980 Dollars)*
Financial Statement
r** = 5.0% i*** = 2.0%
r = 7.5% i = 2.0%
Surety Bond (No Collateral)
r = 5.0% i = 2.0% SC+ = 1.0-1.5%
r = 7.5% i = 2.0% SC = 1.0-1.5%
Letter of Credit (No Collateral)
r = 5.0% i = 2.0% SC = .25-1.0%
r = 7.5% i = 2.0% SC = .25-1.0%
Surety Bond (100% Collateral)
Escrow Account
(Initial Lump-sum Deposit)
Trust Fund
(Individual Operator, Initial
Lump-sum Deposit)
r = 5.0% i = 2.0% SC = 1.0-1.5%
r = 7.5% i = 2.0% SC = 1.0-1.5%
One Year
Before
Abandonment
$9,524
$9,302
$9,619-9,667
$9,395-9,442
$9,548-9,619
$9,369-9,395
$9,899-9,947
$9,897-9,944
Five Years
Before
Abandonment
$7,836
$6,139
$8,268-8,484
$7,371-7,593
$7,945-8,268
$7,067-7,371
$9,490-9,706
$9,462-9,664
Ten Years
Before
Abandonment
$4,810
$3,380
$6,911-7,297
$5,538-5,882
$6,347-6,926
$5,024-5,538
$8,975-9,361
$8,889-9,233
Twenty Years
Before
Abandonment
$3,769
$2,354
$5,015-5,638
$3,373-3,883
$4,085-5,015
$2,609-3,373
$7,975-8,599
$7,749-8,260
**
***
Assumes cost of abandonment equals $10,000 in 1980 dollars at time of abandonment.
r = Operator's real rate of return
i = Real market interest rate
I"SC= Annual service charge on bond, escrow account, or trust fund, as a percentage of total value
-------
APPENDIX C
-------
NET CURRENT ASSETS
NET PROFIT
NET WORTH
OBLIGEE
OPPORTUNITY COST
PERFORMANCE BOND
PLUGGING BOND
RETAINED EARNINGS
STOCKHOLDER'S EQUITY
10-K REPORT
The excess of current assets over
current liabilities; equivalent to
working capital.
The income remaining from all sources
after deducting all expenses, including
corporate taxes and interest on loans,
and available for distribution to
stockholders or retained as earnings.
Total assets minus total liabilities
and is equivalent to stockholders
equity.
Individual or firm (the well owner or
operator) obligated to perform in
compliance with the requirements of a
surety bond, escrow, or trust agreement.
The value of the alternative
opportunities foregone in order to
achieve an objective. The opportunity
cost of capital in trust or escrow or
posted as collateral is equal to the
return that could have been earned from
that capital if invested elsewhere.
Surety bond.
Surety bond written to assure payment
for or performance of proper well
plugging and abandonment.
The accumulated total profits.which
have been undistributed by a firm, and
included in the net worth or equity
section of the balance sheet.
The net worth of a firm after all
obligations have been paid.
Annual report required by the U.S.
Securities and Exchange Commission of
all publicly traded companies,
containing a complete set of financial
statements and summary of operations
for the past year.
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GLOSSARY OF FINANCIAL TERMS
ASSETS
BALANCE SHEET
BENEFICIARY
BLANKET BOND
CAPITALIZATION
CASH FLOW
COLLATERAL
COMMON SIZE MEASURE
The items owned by a firm, the value of
which are shown on its balance sheet at
cost or cost less depreciation.
A statement of a firm's financial
condition at a given date, as indicated
by the book value of assets and
liabilities.
The person or organization (in this
case the regulatory agency) designated
to receive the funds held in trust or
escrow.
A surety bond covering more than one
well within a state.
The total liabilities of a business,
including both ownership capital
(equity) and borrowed capital.
(1) Changes in a firm's cash account
over a given period caused by the
timing of revenues and expenditures.
(2) A measure of corporate worth that
includes net income after taxes plus
the value of tax allowances for
depreciation and depletion.
Property pledged by a well operator to
secure the interests of a surety
company or financial supporter in case
of failure of the operator to perform
as agreed.
Analysis of a firm's financial
performance relative to other firms of
similar size in the same industry, as
indicated by comparing values or trends
in values of financial variables or
ratios.
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CURRENT ASSETS
CURRENT LIABILITIES
DEBT FINANCING
DEPRECIATION
EQUITY FINANCING
INCOME STATEMENT
LEVERAGE
LIABILITIES
LIQUIDITY
LONG-TERM DEBT
Cash and other assets that are
reasonably expected to be realized in
cash or sold or consumed during the
normal operating cycle of the business
or within one year, whichever is
shorter.
Obligations whose liquidation is
reasonably expected to be satisfied by
the use of current assets or the
creation of other current liabilities,
or those expected to be satisfied
within the normal operating cycle of
the business or within one year,
whichever is shorter.
A firm's generation of capital by
borrowing, either from a bank or
through the sale of corporate bonds to
the public.
An allowance deducted from the cost of
a fixed asset to allow for aging, and
providing for a tax credit for the loss
in value.
A firm's generation of capital by sale
of ownership through new issues of
corporate stock.
That portion of a firm's financial
statement which indicates profit and
loss during a given time period.
The proportion of a firm's debts,
bonds, and preferred stock relative to
the value of its common stock.
Any direct financial obligation,
including current liabilities and
long-term debt.
The ease with which assets may be
converted to cash.
That portion of a firm's obligations
that are not expected to be paid in
less than a year.
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