Summary of EPA Webinars on
Financial Responsibility for Geologic Sequestration Wells
EPA provided the following disclaimer to the webinar participants:
The purpose of this public webinar series is for information sharing, and views
or opinions expressed during the presentation belong to the speaker and do not
necessarily represent the views and opinions of the U.S. EPA.
EPA does not have express authority in the Safe Drinking Water Act to accept
and use funds for financial assurance. Consequently, the Agency cannot
implement some of the financial assurance mechanisms described in these
webinars due to the requirement under the Miscellaneous Receipt Act to
deposit funds EPA receives for the use of the Government into the Treasury.
In April and May 2009, EPA sponsored a series of webinars on financial responsibility for
carbon dioxide geologic sequestration (GS) wells. The goal of the series was to encourage
information sharing on potential financial mechanisms that well owners and operators could use
to meet the financial responsibility requirements for GS projects. EPA plans to use the
information gathered through the webinar series to inform its decisions as it develops guidance
related to financial responsibility for GS wells. The webinars addressed the following topics:
• Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements (held
on April 28, 2009).
• Insurance (held on May 20, 2009).
• Self-Insurance: Financial Test and Corporate Guarantee (held on May 26, 2009).
Collectively, about 100 people attended the webinars (many participants attended more than one
webinar). The participants represented a range of organizations with interest in and unique
perspectives on financial responsibility for GS, including EPA regions, corporate, consulting,
and financial services, state/municipal
governments, energy/environmental
non-profits, electricity providers (e.g.,
energy companies and utilities), and
academia. Figure 1 presents the
breakout of participants' affiliations.
Figure 1: Webinar Participants
Energy/Env
Non-profit,
12.1%
Other, 5.7%
Each webinar consisted of a
presentation on specific financial
responsibility instruments, followed by
a facilitated discussion where
participants shared their experiences
with and thoughts about the various
instruments. The purpose of this
report is to summarize the webinar
series.
Corporate/
Consulting/
Financial,
17.7%
emic
EPA
Regions,
34.8%
l State/Local
Government,
13.5%
Electricity
Providers,
9.2%
Page 1
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Webinar overviews
Below is a brief summary of the three webinar presentations. All three presenters gave an
overview of the phases of a GS project and highlighted the phases for which EPA has proposed
financial responsibility requirements (i.e., corrective action, injection well plugging, post-
injection site care and site closure, and emergency and remedial response). Note that the
webinars did not address long-term liability for GS projects. Generally, the presenters then
reviewed the financial responsibility mechanisms in detail and provided a historical background
for their use by describing the current requirements and guidance for wells regulated by the
Underground Injection Control (UIC) Program and state primacy partners. All presenters noted
that Class I hazardous waste disposal wells have specific requirements under 40 CFR 144.63,
while all other well classes follow the general requirement in 40 CFR 144.52(a)(7).
• In the first webinar, Steve Piatt of EPA Region 3 presented "Trust Funds, Letters of
Credit, and Surety Bonds with Standby Trust Agreements." Mr. Piatt described a trust
fund as repository of funds set aside to cover the full estimated cost of properly plugging
wells and implementing post-closure activities. The funds are administered by a trustee
designated by the grantor who establishes the trust. A letter of credit is a guarantee,
issued by a by a bank or other regulated institution, that a specified dollar amount will be
available to a specified party under certain conditions and that funds will be paid into a
standby trust. Mr. Piatt described a surety bond as guarantee by a surety company that
specified obligations, such as plugging of the well, will be fulfilled. Mr. Piatt also
highlighted the difference between performance and financial guarantee bonds. As
required for letters of credit and surety bonds, standby trusts are a mechanism for the UIC
program to receive the funds guaranteed. Mr. Piatt noted that a standby trust is not a
stand-alone financial instrument to guarantee financial responsibility, unlike a trust fund.
For each mechanism, Mr. Piatt noted EPA's history and long-standing experience with
the mechanism.
• In the second webinar, Charles Hernick of The Cadmus Group, Inc. gave the presentation
on "Insurance." Mr. Hernick reviewed the characteristics of insurance in detail and
explained the differences between third party and captive insurance. In general,
insurance can be characterized as a contract for the insurer to pay/reimburse the insured
up to the maximum amount the policy covers for a specified risk, as long as the insured
pays the policy premium. The premium is based on insurer's determination of risk.
Captive insurance—where a company forms a subsidiary to act as the insurer—tends to
more closely resemble a self-insurance mechanism than a third party mechanism. He
defined the term insurance, in the context of his presentation, to refer only to third-party
insurance. The use of insurance for proposed Class VI wells, Mr. Hernick explained,
could be used to cover two types of risk scenarios. The first would cover uncertain risks,
such as emergency and remedial response, and the second type would cover defined
environmental objectives such as well plugging.
• In the third webinar, Dale Ruhter of EPA's Office of Resource Conservation and
Recovery presented the "History of RCRA Subtitle C Financial Test." Mr. Ruhter
described background information on the test and its original intent. Mr. Ruhter then
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provided an overview of the tests and noted that, although revisions were proposed in
1991, they have been neither finalized nor withdrawn.
• Also in the third webinar, Paul Bailey of ICF International presented "Self-Insurance:
Financial Test and Corporate Guarantee." Mr. Bailey started by describing the UIC Class
II Well guidance, which presents a two-part approach for use of a "financial statement"
mechanism for operators with a minimum net worth of $1 million. He summarized the
details and provided examples of the two-part approach. Mr. Bailey also covered the
Class II Well guidance for corporate guarantee. Mr. Bailey continued on to describe the
details of the Class I self-insurance regulation, modeled on the Resource Conservation
and Recovery Act (RCRA) Subtitle C requirements for closure and post-closure, as
another possible model for GS self-insurance. With regard to the role of cost estimates,
Mr. Bailey noted that depending on the case, cost estimates may not be needed for self-
insurance or the cost estimate may be represented in the financial test itself. He
emphasized that including a cost may be more important for gaining public acceptability
that it is for actual test performance. Mr. Bailey added that, although historically there is
a very low risk of failure associated with self-insurance, there is no guarantee of the funds
being available like there is with some other financial responsibility mechanisms.
Appendix A presents the slides for each webinar.
Discussion overview
Following the presentations, EPA held a facilitated discussion to encourage participants to share
their experiences using the financial responsibility instruments, the strengths and weaknesses of
each, and their appropriateness and applicability to the various phases of GS projects. The
following sections summarize the discussion. Note: this summary reflects the opinions of the
webinar participants, and not necessarily that of EPA.
Webinar 1: Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
Participants at the first webinar provided the following insights on the desirability of trust funds,
letters of credit, and surety bonds for financial assurance for GS:
• The concern is not the financial mechanisms, but the risk that they cover. The
availability of these instruments will depend on the risk associated with the project. Some
third parties will be more or less willing to cover that risk.
• It is unclear whether GS projects will require a new instrument, but surety bonds, letters
of credit, and trust funds do not seem to have changed much. It may be worth talking to
insurers to determine what new types of mechanisms could be available.
• Self insurance tests rely on performance over the last two years, but this may not
accurately reflect the health of a company. Strong guidance on the use of self-insurance
is needed, e.g., on specific language to be used in the letter of credit and other
mechanisms. (See the discussion of Webinar 3 for additional input on self-insurance.)
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Participants offered the following perspectives on the individual financial responsibility
instruments presented:
• Letters of credit are simply not available now to the extent that they once were, and
therefore, may not be as significant an option as in the past. This may also be true for
surety bonds to a lesser extent. The availability of these mechanisms would be a problem
for the large corporations that may be involved in GS.
• Banks in areas of the country with a large number of Class II wells are used to issuing
letters of credit and surety bonds; this is less the case in areas where there are fewer
wells.
• One participant believed that, based on his third-party knowledge, states and EPA do not
have the legal resources to use letters of credit, and that surety bonds are superior to the
other options.
• One state finds letters of credit effective and that stand-by trusts are acceptable if they are
drawing on the letter of credit or the surety bond. This state adapts language from the
RCRA Program for UIC.
• Stand-by trusts are easy to obtain because they are sometimes the lowest-cost option;
operators will shop around for banks and sometimes end up making very low annual
contributions. The availability of standby trusts varies, however.
• Some commenters said that, while bond ratings might have been a good measure of
financial strength a year ago, several formerly AAA-rated companies are now
experiencing financial difficulties.
Commenters offered the following discussion of pay-in periods in for trust funds:
• For large, well-capitalized, companies, a pay-in period is perhaps not required or as
useful as it is for small companies.
• One state is examining the use of surety bonds for the early phases of a GS project, with a
trust fund for the longer-term aspects of GS, thereby allowing for the pay-in over the life
of the project.
• One EPA region does not usually allow a pay-in period any longer than 2 or 3 years and
sets out the pay-in requirements in an administrative order or other enforcement action.
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Participants offered the following additional perspectives on financial responsibility
demonstrations:
• The cost estimate for plugging a well should be based on a contractor's cost, not the
operator's cost because the fund may need to be used to hire a contractor for remediation.
• Corporations are set up to minimize risk, and the parties signing the papers for the
financial responsibility mechanisms are not the engineers familiar with the work or the
risk.
Webinar 2: Insurance
Participants discussed circumstances (other than non-payment of premiums) under which an
insurance company can cancel a GS operator's policy.
• One participant expressed concern that, if an insurance company feels that the
owner/operator did not disclose all of the available information about the project, it is
unclear whether the policy would continue to be in force.
• EPA should reduce the possibility of policy cancellation; there needs to be an
endorsement document that substantiates which documenters are disclosed and that those
documents are acceptable to all parties.
• While an insurance certificate shows evidence of a policy, it does not ensure that it
conforms to regulations.
The discussion continued on to the topic of individuals' experiences with insurance for projects
in the UIC Program or in other industries.
• A participant who recently worked on a policy for a US Department of Energy (DOE)
pilot project said that the applicability of insurance and the cost involved is site specific
and varies considerably from one situation to the next.
• Another participant, who also worked with a DOE partnership, said the partnership ended
up working with environmental insurers to determine how to manage their risk, and
developed a policy that took advantage of environmental markets to fill in the gaps of
managing some of the risk.
• A participant from an electric utility has had experience exploring specific insurance
avenues both in commercial insurance as well as mutual insurance arrangements.
Although there is some interest in using gas and electric mutuals for insurance purposes,
mutual companies may be reluctant to provide the high levels of coverage that may be
necessary for GS projects.
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• Utility companies may use captive insurance, but they are looking at third party insurance
in order to use the marketplace to absorb some financial risk.
The group also discussed the desirability of insurance for GS projects:
• Some participants believed that uncertainties exist regarding what insurers are willing to
offer and whether insurance is appropriate.
• Any insurance mechanisms that are used for GS would need to last the life of the project.
• It is important to carefully understand what a policy covers. There has been much debate
between underwriters and industry on this topic.
• One participant believed that EPA should not impose specific requirements. Because of
the economic downturn, insurance companies have suffered losses in their investment
portfolios and imposing specific rules may discourage participations.
The group discussed whether insurance could be combined with other financial assurance
mechanisms to cover a single phase of a GS project (e.g., well closure) and, if so, which
mechanism would kick-in first in the event that a GS owner/operator fails.
• This should be clarified at the outset of project.
• Procedures to manage surety bonds address these types of situations.
Participants offered the following opinions regarding the merits of captive insurance:
• One participant offered that captive insurance includes "pure" single-owner insurance
entities and "group" captives, which are multi-owner insurance companies. The latter
includes both small group captives (such as risk retention groups) and large group
captives, typically called "mutual insurers."
• One participant said he did not find captive insurance to be desirable because the
specifics of what is involved are not always straightforward.
• EPA should look at how insurance is financed for various organizations - whether it is
rated or unrated, and various measurements; captive insurance should at least be
considered.
The group discussed how underwriters determine the price of a policy and whether they have
sufficient knowledge of GS to make accurate estimates.
• EPA should look into this, possibly by meeting with insurers.
• EPA should not propose eligibility requirements for insurers, instead the market will
drive the selection of financially viable insurers.
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• Once demonstration projects are complete and industries become engaged at a
commercial scale, mainline carriers will start to accept this risk if it is shown that there
are no losses associated with the industry.
• It would useful to have a list of approved insurance providers; such a list could change
based on ratings.
Participants offered the following input related to the applicability of insurance during various
phases of a GS project:
• It is important to recognize the difference between covering liabilities versus covering
activities such as well plugging and site closure. The availability of multiple mechanisms
could help keep costs down.
• Insurance probably works best for the operational phases of a facility, which does not
involve unusual technologies (with the exception of sequestering the carbon dioxide).
Insurance becomes problematic during site closure and post-closure care.
Webinar 3: Self-Insurance: Financial Test and Corporate Guarantee
Participants identified the following concerns about self-insurance for GS projects:
• Self-insurance is a high risk proposition because if it fails, there is nothing on which to
fall back.
• Once a company enters bankruptcy, even with a 10 day notice (after bankruptcy
proceedings have started) there is little the regulator can do; this provides an indication
that other methods of demonstrating financial responsibility provide more protection.
• Self-insurance mechanisms are great while the companies are making money, but
economic times change.
• Pooling of industry funds may be a good option, but it takes some time for the pool to
grow.
• There are concerns about the timeframe of the proposed post injection site care
requirement relative to when the test is administered.
• EPA should include self-insurance as an option because it has demonstrated success in
other programs and there is no evidence that it should not be used for GS.
• The complications discussed in this webinar, plus the need to constantly monitor the
company, may indicate that letters of credit and trust funds are a simpler approach to
demonstrating financial responsibility.
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Participants offered the following input regarding the cost of GS activities and the tangible net
worth threshold for GS projects:
• The $10 million tangible net worth threshold seems low, considering the size of GS
projects and what needs to be covered.
• EPA should examine the risks associated with GS and estimate the costs associated with
particular phases—especially the costs of dealing with extreme events. This type of
analysis would help inform the necessary size of a corporation for passing a financial test.
Participants offered the following input regarding evaluating financial tests:
• Differences have been observed between the content of an income statement and what is
provided by a certified public accountant. This requires some effort on the part of the
regulator to ensure that the numbers can be duplicated.
• Validating information is important; the Form 10-K (for publicly traded companies) is
often a better choice to review than the annual report to shareholders.
• Both the financial test and corporate guarantee require a lot of information and time to
review and verify effective assurance.
• Conducting financial tests on multi-level companies is difficult because it is hard to know
which level of the company will actually be financially responsible.
• Participants discussed difficulties related to bond ratings. Regarding the acceptability of
bond ratings, especially those on the lower end of an investment grade rating (BBB or
Baa), one participant claimed that, since companies pay the rating agencies, they may
resist giving a company a below investment-grade rating. Thus, bond ratings may lag
behind the companies' performance if they are close to the threshold. Regulators need to
know why a company's bonds are rated the way they are. A company's risk investment
profile will come across in the rating.
Participants discussed whether self-insurance or corporate guarantees are more appropriate
during certain phases of a GS project, compared to other mechanisms:
• There are currently very few third party mechanisms available for GS. Some insurance
companies will only cover the injection phase (i.e., when the company is making money).
Participants thought that the viability of GS could be limited if self-insurance is not an
option.
• Several participants suggested that, as things progress with GS, there will be more
certainty regarding what the best financial mechanisms are. Therefore it may not be
necessary to solve all the questions now. EPA should focus on well plugging first, and
the bigger unknowns related to financial assurance (e.g., site closure and care) can be
solved later.
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Appendix A - Slide Presentations for the Three Webinars
-------
Webinar on Underground Injection Control (UIC)
Program Applications
Trust Funds, Letters of Credit, and
Surety Bonds with Standby Trust
Agreements
April 28, 2009
This public presentation is for information sharing only. Views or opinions
expressed during the presentation belong to the speaker and do not necessarily
represent the views and opinions of the U.S. EPA.
f \
\ mj
PBO^C
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on Financial Assurance
Mechanisms: Overview
Welcome
¦ Joseph Tiago, U.S. EPA, Headquarters
Presentation on Trust Funds, Letters of Credit, and
Surety Bonds with Standby Trust Agreements
¦ Stephen Piatt, U.S. EPA, Region 3
Discussion Facilitator
¦ Vanessa Leiby, The Cadmus Group, Inc.
iSEZi
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
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Welcome
*****
OfiO
First in a series of EPA webcasts to discuss
potential financial responsibility
mechanisms for GS wells
¦ Part 1. Trust Funds, Letters of Credit, and
Surety Bonds with Standby Trust
Agreements - April 28, 2009
¦ Part 2. Insurance - May 20, 2009
¦ Part 3. Self Insurance: Financial Fests and
Corporate Guarantee - May 26, 2009
Webinar on Financial Responsibility Instruments for GS Wells
A Webinar on Financial Assurance
Mechanisms: Disclaimer
The purpose of this public presentation is for information
sharing and views or opinions expressed during the
presentation belong to the speaker and do not necessarily
represent the views and opinions of the U.S. EPA.
EPA does not have express authority in the Safe Drinking
Water Act to accept and use funds for financial assurance.
Consequently, the Agency cannot implement some of the
financial assurance mechanisms described in these
webinars due to the requirement under the Miscellaneous
Receipt Act to deposit funds EPA receives for the use of
the Government into the Treasury.
Ossij
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements April 28, 2009
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Purpose
OfiO
Review
¦ Proposed financial responsibility requirements for GS
¦ Mechanisms available to meet the current requirements
Discuss
¦ Trust funds
¦ Letters of credit
¦ Surety bonds
¦ Standby trust agreements (for letters of credit & surety
bonds)
Webinar on Financial Responsibility Instruments for GS Wells
Desired Outcome
At the end of this webinar series:
¦ Participants will have exchanged information on
their experiences with these financial assurance
instruments.
Participants will have shared information on
special considerations for meeting the unique
needs of geologic sequestration wells.
Ossij
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
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¦ Federal Requirements Under the UIC
Program for Carbon Dioxide Geologic
Sequestration Wells
¦ Proposal published: July 25, 2008
¦ Comment period closed: December 24, 2008
¦ Notice of Data Availability: Spring 2009
¦ Final rule expected 2010 or 2011
h)
Webinar on Financial Responsibility Instruments for GS Wells
Carbon Dioxide GS Rulemaking:
Proposed Financial Responsibility Requirements
The owner or operator must demonstrate and maintain
financial responsibility and resources for:
¦ Corrective action (that meets the requirements of § 146.84),
¦ Injection well plugging (that meets the requirements of § 146.92),
¦ Post-injection site care and site closure (that meets the
requirements of §146.93), and
¦ Emergency and remedial response (that meets the requirements of
§146.94) in a manner prescribed by the Director
¦ The operator must provide an adjustment of the cost
estimate to the Director if the Director has reason to
believe that the original demonstration is no longer
adequate to cover the cost of injection well plugging and
« post-injection site care and site closure
V '
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
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^ Carbon Dioxide GS Rulemaking: Summary
¦ ..
¦ EPA received comments in the following
areas:
¦ Usefulness/ appropriateness of various
instruments
¦ Improvements for some instruments
¦ Need for flexibility to encourage commercial
scale development of CCS
¦ Need for guidance on financial responsibility
(j9e)
Webinar on Financial Responsibility Instruments for GS Wells 9
Presentation on Trust Funds, Letters of
Credit, and Surety Bonds with Standby
Trust Agreements
Ossij
Stephen Piatt, U.S. EPA, Region 3
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements April 28, 2009
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¦ )
9
ff
Phases of a GS Project
Siting
Area of
Review
and
Corrective
Action |
Well
Construction
* I
Injection/
Operation/
Monitoring
• i
Injection
Well
Plugging
• ¦
Post-
Injection
Site Care
and
A Site |
"Closure
Long-Term
Care
»
K.
Emergency and Remedial Response
>
$
QSSJ
I
Webinar on Financial Responsibility Instruments for OS Wells
11
Available Mechanisms
Mechanisms
Third Party Instruments
Self Insurance Instruments
Letters of
Credit
Surety
Bonds
Financial
Test
Trust Funds
Insurance
Corporate
Guarantee
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
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Trust Funds
What is a trust fund?
Note: Class I has specific requirements under 40 CFR 144.63 and other well
classes don't. They follow the general requirement in 40 CFR 144.52(a)(7)
¦ Repository of funds set aside for a specific purpose
¦ Administered by a trustee; designated by the grantor who establishes
the trust
¦ Funds must cover the full estimated cost of properly plugging wells
and implementing post-closure activities
¦ For Class II. interest can go to owner/operator if the amount in the
fund exceeds plugging/post closure costs; otherwise, interest is
reinvested
\|0
Webinar on Financial Responsibility Instruments for GS Wells
Trust Funds: Current UIC
Program Trustee Responsibilities
¦ Invest deposited funds, with guidance from the
owner/operator
¦ Provide EPA with an annual valuation of the fund
¦ Accept additional deposits or release funds as the
owner/operator drills addition wells or implements
plugging and closure activities on some wells
¦ EPA may delay payments if the cost of the entire
operation changes, or the Agency may release funds if
the value exceeds estimated closure costs
(3)
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements April 28, 2009
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*****
(safe)
Trust Funds: Current UIC
Trust Requirements
Trusts must meet the following requirements for Class I
(other classes do not have specific requirements):
¦ Be established at a bank or other eligible institution
¦ Contain funds equal to estimated costs associated with plugging
and post-closure activities
¦ Specify the acceptable ways that the trustee can invest the fund's
money
¦ It must designate EPA as the beneficiary.
¦ Be accompanied by a "certificate of acknowledgement" Investing
deposited funds, with guidance from the owner/operator
¦ Specify conditions for authorizing payments or the return of funds
Trustee must be free of conflicts of interest
Webinar on Financial Responsibility Instruments for GS Wells
15
Trust Funds: Current UIC
Program Pay-In Periods
The owner or operator may deposit funds into the
trust fund in phases; that is, either over the term of
the initial permit or over the remaining operating
life of the injection well (as estimated in the well
plugging plan), whichever period is shorter
The pay-in period should factor in the possibility
that the owner or operator may face financial
distress prior to the trust being fully funded
Ossij
Webinar on Financial Responsibility Instruments for GS Wells
16
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
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Letter of Credit
What is a Letter of Credit?
¦ Guarantee that a set amount of money will be available
to a specified party under certain conditions
It should:
¦ Provide that funds will be paid into a standby trust
¦ Be issued by a by a bank or other regulated and examined
institution
* Allow UIC Program Director to draw upon letter of credit if
the owner/operator fails to provide a substitute within 90
days
¦ Have a standby trust fund
Ossi
Webinar on Financial Responsibility Instruments for GS Wells
17
M >
Surety Bonds
What is a surety bond?
¦ Guarantee by a surety company that specified obligations such as
plugging and abandoning UIC wells will be fulfilled
¦ Should meet the following criteria:
¦ Be backed by a standby trust fund
¦ Be issued by an eligible surety company
¦ Require that the issuing institution provide 120-day notice if it plans not to reissue
credit
¦ May draw upon the letter and must provide that the UIC program director may
draw upon the letter of credit if owner/operator fails provide a substitute within 90
days
¦ Two types of surety bonds can demonstrate financial responsibility:
¦ Financial guarantee bond
¦ Performance bonds
Ossij
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
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Types of Surety Bonds
OfiO
Performance Bond
¦ Directly tied to contract between contractor and project owner
¦ Guarantees that contractor will properly plug the GS wells. If
contractor defaults on contract, surety company will:
¦ Finance original contractor to complete the project
¦ Pay for a new contractor to plug the wells
¦ Contract out the plugging of the wells
¦ Pay the amount of the bond
Financial Guarantee Bond
¦ May be identical to performance bond, however, claim pay-out
normally takes the form of monetary compensation rather than
negotiating with contractors
Webinar on Financial Responsibility Instruments for GS Wells
19
Eligibility Requirements for Sureties
Under Current UIC Requirements
For Class I UIC wells, eligible surety bond
providers must be listed by the U.S.
Department of Treasury on its Circular 570
(40 CFR 144)
Class II Guidance suggests using such
providers
0®ij
Webinar on Financial Responsibility Instruments for GS Wells
20
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
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Standby Trusts
t>" ar fi
What is a standby trust?
¦ Required for letters of credit and surety bonds
¦ A mechanism to receive on behalf of the UIC
program director the funds guaranteed by surety
bonds or letters of credit
¦ Unlike a funded trust, a standby trust is not a
stand-alone financial instrument to guarantee
financial responsibility
h)
Webinar on Financial Responsibility Instruments for GS Wells
Facilitated Discussion
Moderator:
Vanessa Leiby, The Cadmus Group, Inc.
Please type in questions using the webcast question pane on
your control panel, or you may respond by phone.
y""'%
(3)
Webinar on Financial Responsibility Instruments for GS Wells
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
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Questions for Discussion
What experience have you had with trust funds, letters of credit, and/or
surety bonds?
If EPA were to obtain legal authority, should these mechanisms be
considered for financial assurance for GS? Why or why not?
¦ Trust funds?
¦ Letters of Credit?
¦ Surety Bonds?
What guidance should EPA provide for GS and other wells?
Describe your experience from the state/regional perspective with the
management of trust funds, letters of credit, and/or surety bonds?
OfiO
Webinar on Financial Responsibility Instruments for GS Wells
23
-
Questions for Discussion
How well do tru st funds, letters of credit, and surety bonds
work for UIC wells? What additional eligibility
requirements should be considered for sureties?
Are bond ratings an appropriate measure of financial
strength?
Is payment over time appropriate for a trust fund?
If appropriate, what constitutes an appropriate pay in
period?
Are standby trust agreements readily obtained?
Ossij
Webinar on Financial Responsibility Instruments for GS Wells
24
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements April 28, 2009
-------
Thank You!
More information about the Geologic Sequestration of
Carbon Dioxide (C02)
¦ EPA Geologic Sequestration of Carbon Dioxide Website:
http://www.epa. gov/safewater/uic/wells seauestration.html
¦ Text of the Proposed rule for Federal Requirements Under the UIC Program for
Carbon Dioxide (CO,) Geologic Sequestration (GS) Wells:
http://www.epa.gov/fedrgstr/EPA-WATER/2008/Julv/Dav-25/wl6626.pdf
¦ Docket for the rule: www.regulations.gov. Docket ID EPA-HO-QW-2008-0390
Webinar on Financial Responsibility Instruments for GS Wells
25
Webinar on UIC Program Applications:
Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements
April 28, 2009
-------
Webinar on Underground Injection Control (UIC)
Program Applications
Insurance
May 20,2009
This public presentation is for information sharing only. Views or opinions
expressed during the presentation belong to the speaker and do not necessarily
represent the views and opinions of the U.S. EPA..
f " \
{
"t PRO"**
Webinar on Financial Assurance Mechanisms:
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Webinar on UIC Program Applications:
Insurance May 20,2009
-------
0 Webinar on Financial Assurance Mechanisms:
Overview
Welcome
¦ Bruce Kobelski, U.S. EPA, Headquarters
Presentation on Insurance
¦ Charles Hernick, The Cadmus Group, Inc.
Discussion Facilitator
¦ Vanessa Leiby, The Cadmus Group, Inc.
,52122/
Webinar on Financial Assurance Mechanisms:
Welcome
Second in a series of EPA webcasts to
discuss potential financial responsibility
mechanisms for GS wells
¦ Part 1. Trust Funds, Letters of Credit, and
Surety Bonds with Standby Trust Agreements
April 28, 2009
¦ Part 2. Insurance - May 20, 2009
¦ Part 3. Self Insurance: Financial Tests and
Corporate Guarantee - May 26, 2009
Webinar on UIC Program Applications:
Insurance May 20,2009
-------
Webinar on Financial Assurance Mechanisms:
Disclaimer
¦ The purpose of this public presentation is for information
sharing and views or opinions expressed during the
presentation belong to the speaker and do not necessarily
represent the views and opinions of the U.S. EPA.
¦ EPA does not have express authority in the Safe Drinking
Water Act to accept and use funds for financial assurance.
Consequently, the Agency cannot implement some of the
financial assurance mechanisms described in these
webinars due to the requirement under the Miscellaneous
Receipt Act to deposit funds EPA receives for the use of
the Government into the Treasury.
C- \
.53&/
Webinar on Financial Assurance Mechanisms:
Purpose
Review of:
- Proposed financial responsibility requirements
- Insurance mechani sms available to meet the requirements
• Third Party Insurance
• Captive Insurance
Facilitated Discussion on:
- Experiences using insurance
- When in the GS lifecycle insurance may be most appropriate
- What type of guidance is needed
Webinar on UIC Program Applications:
Insurance May 20,2009
-------
Webinar on Financial Assurance Mechanisms:
Desired Outcome
At the end of this webinar series:
¦ Participants will have exchanged information on
their experiences with insurance as a financial
assurance mechanism.
Participants will have shared information on
special considerations for meeting the unique
needs of geologic sequestration wells.
,52122/
Carbon Dioxide GS Rulemaking:
Milestones
Federal Requirements Under the UIC
Program for Carbon Dioxide Geologic
Sequestration Wells
¦ Proposal published: July 25, 2008
¦ Comment period closed: December 24, 2008
Notice of Data Availability: 2009
Final rule expected 2010 or 2011
Webinar on UIC Program Applications:
Insurance May 20,2009
-------
M
|
dL.
Carbon Dioxide GS Rulemaking:
Proposed Financial Responsibility Requirements
¦ § 146.85(a) The owner or operator must demonstrate and
maintain financial responsibility and resources for:
¦ Corrective action (that meets the requirements of § 146.84),
¦ Injection well plugging (that meets the requirements of § 146.92),
¦ Post-injection site care and site closure (that meets the
requirements of §146.93), and
¦ Emergency and remedial response (that meets the requirements of
§146.94) in a manner prescribed by the Director
¦ § 146.85(b) The operator must provide an adjustment of the
cost estimate to the Director if the Director has reason to
believe that the original demonstration is no longer
adequate to cover the cost of injection well plugging and
post-injection site care and site closure
C- \
t'
Carbon Dioxide GS Rulemaking: Summary of
Comments Received on Proposed Regulations
EPA received comments in the following
areas:
¦ Usefulness/ appropriateness of various
instruments
¦ Improvements for some instruments
¦ Need for flexibility to encourage commercial
scale development of CCS
¦ Need for guidance on financial responsibility
Webinar on UIC Program Applications:
Insurance May 20,2009
-------
Webinar 011 Financial Assurance Mechanisms
Presentation on Insurance
Charles Hernick, The Cadmus Group, Inc.
(Ik)
Webinar on Financial Assurance Mechanisms
Phases of a GS Project
Emergency and Remedial Response
im
Webinar on UIC Program Applications:
Insurance
May 20,2009
-------
Mechanisms
Letters of
Credit
Surety
Bonds
Financial
Test
Trust Funds
Insurance
Corporate
Guarantee
Self Insurance Instruments
Third Party Instruments
.53&/
Webinar on Financial Assurance Mechanisms:
Overview of Insurance
Characteristics and Definitions
- Contract between the insurer and insured
- Policy covers specific risks up to a maximum amount
- Insured pays policy premium
- Premium based on carrier's determination of risk
- If event occurs, insurer pays/reimburses insured
- Third Party/Commercial: Insurance carrier is not
affiliated with the insured party by ownership
- Captive Insurance: The insured company or companies
share ownership of their insurance carrier
Webinar on UIC Program Applications:
Insurance
May 20,2009
-------
Class I has specific requirements under 40 CFR 144.63 (Other
well classes do not; rather, they follow the general requirement in
40 CFR 144.52(a)(7))
The owner/operator has primary responsibility for closure and
post-closure obligations and any needed corrective action
Options for closure and post-closure include trust funds, surety
bonds, letters of credit, insurance, proof of owner/operator
financial responsibility, guaranty of related party
Webinar on Financial Assurance Mechanisms:
Class I Hazardous Waste Wells
Webinar on Financial Assurance Mechanisms:
Class I Hazardous Waste Wells
Insurance
¦ Does not specify language for insurance
policies
¦ Requires a Certificate of Insurance from
owner/operator that policy conforms to regulations
" Insurer must pay out funds upon the direction
of regulatory agency
¦ Amount of coverage to be equal to covered
event
Webinar on UIC Program Applications:
Insurance
May 20,2009
-------
Webinar on Financial Assurance Mechanisms:
Class II Financial Instruments
Class II wells follow a general requirement in 40 CFR
144.52(a)(7)
Guidance provides a choice of financial instruments (EPA
UIC Program Guidance # 67, May 9, 1990)
The permittee, including the transferor of a permit, is
required to demonstrate and maintain financial
responsibility and resources to close, plug, and abandon
the underground injection operation in a manner prescribed
by the Director 144.52 (a) (7) (i)
,52122/
Webinar on Financial Assurance Mechanisms:
Class II Financial Instruments
For EPA-administered programs, the transferor of a
Class I. II, or III well is required to demonstrate and
maintain financial responsibility and resources to close,
plug, and abandon the underground injection operation
in a manner prescribed by the Director (40 CFR 144.28
(d)(1))
Instruments specifically named: surety bonds, trust
funds, letters of credit, financial statements
Insurance not specifically named in 1990 guidance
Webinar on UIC Program Applications:
Insurance May 20,2009
-------
Webmar 011 Financial Assurance Mechanisms
Applicability of Insurance to GS
¦ There are current third party policies written for GS
¦ Reflect underwriters' assessment of risks:
- Pollution, business interruption, loss of well control,
transmission of C02, induced seismicity, operational issues
(human failure)
- Possible damages: ground water, mineral stocks, plant and
human death, release to atmosphere (tax credit loss), migration
out of reservoir
¦ Risk reduction starts with site selection
¦ Environmental Finance Advisory Board (EFAB) Recommendations 011 captive
insurance for the RCRA program (March 20, 2007):
- The financially responsible affiliate should either (a) pass the financial test and
unconditionally guarantee the obligations of the captive or (b) possess investment
grade rating, or
- The captive entity issuing the insurance policy should have a rating of "secure" or
better by AM Best or comparable rating agency
- The rating of the captive should be formally reviewed by the rating agency
annually, and States should be notified within 30-days of a rating change, an
outlook change, or a rating being placed under review
¦ Class I Hazardous Requirements: Carriers must "be licensed to transact the business
of insurance, or eligible to provide insurance as an excess or surplus lines insurer," in
at least one state; no minimum rating
.53&/
19
Webinar on Financial Assurance Mechanisms
Applicability of Insurance to GS (cont.)
(m
•20
Webinar on UIC Program Applications:
Insurance
May 20,2009
-------
&i. Webinar on Financial Assurance Mechanisms:
Insurance for GS: Strengths
Provides assurance to regulating agency
Provides source of payment to the insured or other parties
Assumes adequate coverage for risk
Addresses environmental risks that are known to occur
(although it is difficult to predict risk in general)
Provides site-specific flexibility
Carrier may not require collateral or credit restrictions
Allows for more competitive price and fewer restriction on
capital
Expands variety of mechanisms available
,52122/
Webinar on Financial Assurance Mechanisms:
Insurance for GS: Weaknesses
Site specific policies may lead to complex documents and decisions for
regulators
- In the event of a claim, responsible party may still be obligated to
reimburse the carrier
- Insurance regulations vary by state
- Insurers make their own assessments of risk and payment
All parties need to be well informed to make sure coverage is adequate
Cost estimates may vary in accuracy; look at limit of liability
Delayed or denied payment of legitimate claims possible
Ongoing debate about whether the legal separation implies sufficient
financial separation for captive Insurance
Webinar on UIC Program Applications:
Insurance
May 20,2009
-------
Webinar on Financial Assurance Mechanisms:
Insurance Examples
Growing body of literature on financial assurance for
GS—many studies focus on insurance
- Obtain private insurance or bonds from injection through post-
closure
- Caps and premiums are risk-based and based on site performance
- Permitting for early projects could be regulated under modified
UIC program with CCS-specific legislation in place; individual
applicants must show proof of financial resources for site care and
remediation
- Alternative for early projects is Price Anderson model - individual
insurance with liability cap using lower thresholds
,52122/
m Webinar on Financial Assurance Mechanisms:
Insurance Examples
Price-Anderson Act Model Financial
Requirements (for Nuclear projects)
¦ Licensees required to obtain maximum
amount of private liability insurance
available on market, currently $300 million
(or show proof of comparable resources)
¦ Licensees are strictly liable for
"extraordinary nuclear occurrences"
Webinar on UIC Program Applications:
Insurance May 20,2009
-------
Webinar 011 Financial Assurance Mechanisms:
Facilitated Discussion
Moderator:
Vanessa Leiby, The Cadmus Group, Inc.
Please type in questions using the webcast question pane on
your control panel, or you may respond by phone.
.53&/
Webinar on Financial Assurance Mechanisms:
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Webinar on UIC Program Applications:
Insurance May 20,2009
-------
Webinar on Financial Assurance Mechanisms:
Questions for Discussion
Should insurance be considered for financial assurance for
GS? Why or why not?
What experiences have you had with insurance for GS or
other related industries?
Can/should specific procedures for insurance be established in
the GS rule?
Are captive and third party insurance equally suited to GS?
Should EPA propose requirements for determining which
insurers are eligible to provide policies for GS?
If insurance is considered for GS, what type of guidance
should be available?
Oss/
m Webinar on Financial Assurance Mechanisms:
Questions for Discussion
Does insurance make more sense for a financial responsibility
demonstration during one phase (or all phases) compared to other
mechanisms?
Emergency and Remedial Response
Webinar on UIC Program Applications:
Insurance May 20,2009
-------
Webinar on Financial Assurance Mechanisms:
Thank You!
More information about the Geologic Sequestration of
Carbon Dioxide (C02)
EPA Geologic Sequestration of Carbon Dioxide Website:
http://www.epa.gov/safewater/uic/wells seauestration.html
Text of the Proposed rule for Federal Requirements Under the UIC Program for
Carbon Dioxide (CO,) Geologic Sequestration (GS) Wells:
http://www.epa.gov/fedrgstr/EPA-WATER/2008/Julv/Dav-25/wl6626.pdf
Docket for the rule: www.regulations.gov. Docket ID EPA-HQ-OW-2008-0390
i A
\m)
Webinar on UIC Program Applications:
Insurance May 20, 2009
-------
Webinar on Underground Injection Control (UIC)
Program Applications
Self-Insurance: Financial Test and
Corporate Guarantee
May 26,2009
This public presentation is for information sharing only. Views or opinions
expressed during the presentation belong to the speaker and do not necessarily
represent the views and opinions of the U.S. EPA.
i G ^
ISE2/
Webinar on Financial Assurance Mechanisms:
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IS)
Webinar Now
Webinar B: 731-93S-951
GoToWebmar™
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee
May 26, 2009
-------
0 Webinar on Financial Assurance Mechanisms:
Overview
Welcome
¦ Joseph Tiago, U.S. EPA, Headquarters
History of RCRA Subtitle C Financial Test
¦ Dale Ruhter, U.S. EPA, Headquarters
Presentation on Self-Insurance
¦ Paul Bailey, ICF International
Discussion Facilitator
¦ Vanessa Leiby, The Cadmus Group, Inc.
Webinar on Financial Assurance Mechanisms:
Welcome
Third in a series of EPA webinars to discuss
potential financial responsibility
mechanisms for GS wells
¦ Part 1. Trust Funds, Letters of Credit, and
Surety Bonds with Standby Trust Agreements -
April 28, 2009
¦ Part 2. Insurance - May 20, 2009
¦ Part 3. Self Insurance: Financial Test and
Corporate Guarantee - May 26, 2009
: A \
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009
-------
Webinar on Financial Assurance Mechanisms:
Disclaimer
The purpose of this public presentation is for information
sharing and views or opinions expressed during the
presentation belong to the speaker and do not necessarily
represent the views and opinions of the U.S. EPA.
EPA does not have express authority in the Safe Drinking
Water Act to accept and use funds for financial assurance.
Consequently, the Agency cannot implement some of the
financial assurance mechanisms described in these
webinars due to the requirement under the Miscellaneous
Receipt Act to deposit funds EPA receives for the use of
the Government into the Treasury.
imj
Webinar on Financial Assurance Mechanisms:
Purpose
Review of:
¦ Proposed financial responsibility requirements
¦ History of RCRA Subtitle C Financial Test
¦ Self-insurance: financial test and corporate guarantee
mechanisms available to meet the requirements
Facilitated Discussion on:
¦ Experiences using self-insurance
¦ When in the GS lifecycle self-insurance may be most
appropriate
¦ What type of guidance is needed
i G "i
OSfe)
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Coiporate Guarantee
May 26, 2009
-------
Webinar on Financial Assurance Mechanisms:
Desired Outcome
At the end of this webinar series:
¦ Participants will have exchanged information on
their experiences with self-insurance (financial
test and corporate guarantee) as financial
assurance mechanisms
Participants will have shared information on
special considerations for meeting the unique
needs of geologic sequestration wells
UK
& Webinar on Financial Assurance Mechanisms:
C02 GS Rulemaking: Milestones
Federal Requirements Under the UIC
Program for Carbon Dioxide Geologic
Sequestration Wells
¦ Proposal published: July 25, 2008
¦ Comment period closed: December 24, 2008
Notice of Data Availability: 2009
Final rule expected 2010 or 2011
OSfe)
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009
-------
Webinar on Financial Assurance Mechanisms:
C02 GS Rulemaking:
Proposed Financial Responsibility Requirements
§ 146.85(a) The owner or operator must demonstrate and
maintain financial responsibility and resources for:
¦ Corrective action (that meets the requirements of § 146.84),
¦ Injection well plugging (that meets the requirements of § 146.92),
¦ Post-injection site care and site closure (that meets the
requirements of §146.93), and
¦ Emergency and remedial response (that meets the requirements of
§ 146.94) in a manner prescribed by the Director
§ 146.85(d) The operator must provide an adjustment of the
cost estimate to the Director if the Director has reason to
believe that the original demonstration is no longer
adequate to cover the cost of injection well plugging and
post-injection site care and site closure
(mj
Webinar on Financial Assurance Mechanisms:
C02 GS Rulemaking: Summary of Comments
Received on Proposed Regulations
EPA received comments in the following
areas:
¦ Usefulness/ appropriateness of various
instruments
¦ Improvements for some instruments
¦ Need for flexibility to encourage commercial
scale development of CCS
¦ Need for guidance on financial responsibility
OSfe)
to:
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Coiporate Guarantee
May 26, 2009
-------
Webinar 011 Financial Assurance Mechanisms
Presentation on
History of RCRA Subtitle C Financial Test
¦ The current financial test used in the RCRA Subtitle C
program was initially promulgated in 1982
¦ The intent of the test is to allow firms that are capable of
meeting their environmental obligations to self-assure, thus
avoiding the cost of obtaining a third-party instrument
¦ The test was developed based on criteria of performance,
availability, and public and private costs
¦ A summary of the RCRA Subtitle C financial test for
closure and post-closure is below
Dale Ruhter, U.S. EPA, Headquarters
11
Webinar on Financial Assurance Mechanisms
RCRA Subtitle C Financial Test:
Background
i
sk;
12
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Coiporate Guarantee
May 26, 2009
-------
¦ The financial test and corporate guarantee cover
an estimated:
¦ 37% of the Treatment, Storage, or Disposal
facilities (TSDs), and
¦ 56% of the TSDs' RCRA closure and post-
closure obligations
¦ Financial tests similar to that for RCRA Subtitle C
closure and post-closure are also used by other
programs, such as Class I UIC facilities for
plugging and abandonment
¦ The Agency first proposed revisions to the RCRA
Subtitle C financial test in 1991
¦ These revisions have been neither finalized nor
withdrawn
¦ In 2005, EPA promulgated a different financial test
that can be used by a subset of hazardous waste
facilities (those operating under a RCRA
standardized permit)
Webinar on Financial Assurance Mechanisms
RCRA Subtitle C Financial Test:
Subsequent Developments
- — **
~» i#
14
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Coiporate Guarantee
May 26, 2009
-------
22
Webinar on Financial Assurance Mechanisms
RCRA Subtitle C Financial Test for
Closure and Post-Closure
¦ RCRA Subtitle C Financial Test - Alternative I
¦ Must meet two of the following three ratios:
¦ Total liabilities to net worth less than 2.0;
¦ Sum of net income plus depreciation, depletion, and amortization to total
liabilities greater than 0.1; and,
¦ Current assets to current liabilities greater than 1.5; and
¦ Net working capital and tangible net worth each at least six times
the sum of current closure and post-closure cost estimates and the
current plugging and abandonment cost estimates; and
¦ Tangible net worth of at least $10 million; and
¦ Assets in the U.S. of at least 90% of total assets or at least six times
the sum of current closure and post-closure cost estimates and the
j-k current plugging and abandonment cost estimates
ussi 1
Webinar on Financial Assurance Mechanisms
RCRA Subtitle C Financial Test for
Closure and Post Closure
¦ RCRA Subtitle C Financial Test - Alternative II
¦ A current rating for the most recent bond issuance of AAA, A A,
A, or BBB as issued b\ Standard & Poor's or Aaa, A a. A, or Baa
as issued by Moody's; and
¦ Tangible net worth of at least six times the sum of current closure
and post-closure cost estimates and the current plugging and
abandonment cost estimates; and
" Tangible net w orth of at least $10 million; and
" Assets in the U.S. of at least 90% of total assets or at least six
times the sum of current closure and post-closure cost estimates
and the current plugging and abandonment cost estimates
- ***
USB/ is
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009
-------
Presentation on Self-Insurance: Financial
Test and Corporate Guarantee
Paul Bailey, ICF International
Webinar on Financial Assurance Mechanisms:
Phases of a GS Project
Emergency and Remedial Response
issej
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Coiporate Guarantee
May 26, 2009
-------
Mechanisms
Third Party Instruments
Self Insurance Instruments
Letters of
Credit
Financial
Test
Surety
Bonds
Trust Funds
Insurance
Corporate
Guarantee
Webinar on Financial Assurance Mechanisms:
Self-Insurance Models
Class II Self-Insurance
Class I Self-Insurance
Use
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee
May 26, 2009
-------
0 Webinar 011 Financial Assurance Mechanisms:
¦ Class II Guidance for Self-Insurance
¦ UIC Class II Well guidance (EPA UIC
Program Guidance # 67, May 9, 1990)
presents a two-part approach for use of a
"financial statement" mechanism for those
with a minimum net worth of $1 million:
¦ Part 1: Meet "financial coverage criteria"
¦ Part 2: Pass bond rating alternative or five
financial tests
* History of plugging wells
¦ Remaining economic life of production fields or
leases
¦ Number of years in business
* Number of production fields
¦ Number of wells
¦ Estimated cost of well plugging
¦ Financial condition
(Source: EPA UIC Program Guidance M 67, May 9 1990)
21
Webinar 011 Financial Assurance Mechanisms:
Class II Guidance Financial Coverage
Criteria
i
sk;
22
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Coiporate Guarantee
May 26, 2009
-------
Webinar on Financial Assurance Mechanisms:
Class II Guidance Bond Rating
Alternative
Most recent rating on bonds used to raise
capital should be within the four highest
categories:
¦ Standard & Poor's (AAA, AA, A, or BBB)
¦ Moody's (Aaa, Aa, A, or Baa)
Submit annual report of bond rating
Webinar on Financial Assurance Mechanisms:
Class II Guidance Financial Tests
Type of Ratio
Formula
Threshold
1) Debt-Equity Ratio
Current Liabilities
Net Worth
<1.0
2) Debt-Equity
Lona Term Liabilities
Net Worth
<2.0
3) Liquidity
Current Assets-Current Liabilities
Total Assets
>-0.10
4) Cash Return on Liabilities
Net Income + Depreciation
+ Depletion + Amortization
Total Liabilities
>0.10
5) Net Profit
Revenues - Expenses
>0
(Source: fil'A tflC Program Guidance # 67, May 9. 1990)
- ^ .
isazzj 24
i,
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009
-------
,W >
Webinar on Financial Assurance Mechanisms:
^ Class II Financial Test Submission
¦ Provide either:
¦ A full auditor's opinion from independent
Certified Public Accountant (CPA)
¦ A "Glossy" financial statement
¦ A 10K Report, submitted to the Securities and
Exchange Commission
¦ A Federal Energy Regulatory Commission Form 2
Report
(Sou,
rce: EPA UIC Program Guidance #67, May 9, 1990)
(sag/
25
Webinar on Financial Assurance
Mechanisms: Class II Guidance
Corporate Guarantee
¦ May be issued by a large parent corporation that
owns at least 50% of the subsidiary's voting stock
¦ Parent must have been in business at least five
years and have net worth at least $1 million
¦ Guarantee typically made in writing by a
corporate officer authorized to legally bind the
parent
¦ Presumably, parent must pass all 5 financial tests
(Source: EPA UIC Program Guidance #67, May 9, 1990)
OSfe)
35
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009
-------
Webinar 011 Financial Assurance Mechanisms
Class I Self -Insurance
¦ Self-insurance option is spelled out at 40 CFR 144
Subpart F, specifically § 144.63(f)
¦ Must satisfy one of two financi al tests
¦ Must submit signed Chief Financial Officer letter,
independent CPA's (1) report on examination of
financial statements and (2) special report reconciling
numbers
¦ Auditor's opinion must be "clean"
(Source: 40 CFR 144.63(f)(10))
%
¦ Two of the following three ratios:
¦ Total Liabilities / Net Worth < 2.0
¦ sum of net income plus depreciation, depletion and amortization
(NIDDA) / Total Liabilities >0.1
¦ Current Assets/Current Liabilities >1.5
¦ Net Working Capital (NWC) and Tangible Net Worth
(TNW) each at least 6 times the cost estimate
¦ TNW at least $10 million
¦ Assets in U.S at least 90% of total assets or at least 6 times
the cost estimate
(Source: 40 CFR 144.63(f)(10))
Webinar on Financial Assurance Mechanisms:
Class I Financial Test Alternative I
agy
% ***
28
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Coiporate Guarantee
May 26. 2009
-------
Webinar 011 Financial Assurance Mechanisms:
Class I Financial Test Alternative 2
¦ Current rating for most recent bond
issuance of AAA, AA, A or BBB (S&P) or
Aaa, Aa, A, or Baa (Moody's)
¦ TNW at least 6 times the cost estimate
¦ TNW at least $10 million
¦ Assets in U.S at least 90% of total assets or
at least 6 times the cost estimate
(Source: 40 CFR 144.63(f) (10))
ISSEZi 29
V,
Webinar 011 Financial Assurance Mechanisms:
Class I Corporate Guarantee
¦ Written guarantee by parent following
specified terms
¦ Parent must satisfy self-insurance
requirements
(Source: 40 CFR 144.63(f)(10))
i — »
iSSKi
33
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009
-------
Class II (no role) vs. Class I hazardous
(included in "multiples")
RCRA financial tests use either site-specific
or categorical cost information
Unlike other mechanisms, not limited to the
amount of assurance
Webinar 011 Financial Assurance Mechanisms:
Potential Strengths of Self Insurance
Webinar on Financial Assurance Mechanisms:
Role of Cost Estimate
Historically - Very low risk of failure
Solid analytical and experiential foundation
for class I tests:
* EPA Office of Inspector General report (March 30, 2001)
indicates that firms with less than $10 million in tangible net
worth went bankrupt four times more frequently than firms
with tangible net worth greater than $ 10 million.
Low cost (annual documentation)
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee
May 26, 2009
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Webinar on Financial Assurance Mechanisms:
Potential Weaknesses of Self Insurance
¦No guarantees
¦ Risk of inadequate or excessive
oversight
Webinar on Financial Assurance Mechanisms:
Facilitated Discussion
Moderator:
Vanessa Leiby, The Cadmus Group, Inc.
Please type in questions using the webcast question pane on
your control panel, or you may respond by phone.
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Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009
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Webinar on Financial Assurance Mechanisms:
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Webinar on Financial Assurance Mechanisms:
Questions for Discussion
Does self insurance or corporate guarantees make more sense for a
financial responsibility demonstration during one phase (or all phases)
compared to other mechanisms?
Emergency and Remedial Response
(say
Webinar 011 Financial Assurance Mechanisms:
Thank You!
More information about the Geologic Sequestration of
Carbon Dioxide (C02)
EPA Geologic Sequestration of Carbon Dioxide Website:
http://www. epa.gov/sal'ewater/me/wells sequestration.html
Text of the Proposed rule for Federal Requirements Under the UIC Program for
Carbon Dioxide (CO,) Geologic Sequestration (GS) Wells:
http://www.epa.gov/fedrgstr/EPA-WATER/2008/Julv/Dav-25/wl6626.pdf
Docket for the rule: www.reg illations .gov. Docket ID EPA-HQ-OW-2008-0390
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38
Webinar on UIC Program Applications:
Self-Insurance: Financial Test and Corporate Guarantee
May 26, 2009
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