SIGMA Maintenance, Environmental & Safety Share Group

September 2016

San Antonio, Texas

Maintenance & Environmental Acquisition Landmines

Perspectives and fine printMaintenance & Environmental Acquisition Pitfalls

1Antea USA, Inc.

1. Warm-up

2. Understanding the Deal

3. Defining Liabilities

4. Quantifying Liabilities

5. Other considerations

6. Portfolio Integration

AgendaMaintenance & Environmental Acquisition Pitfalls

2Antea USA, Inc.

What are some pitfalls that you have come across during Acquisitions?

Warm-upMaintenance & Environmental Acquisition Pitfalls

3Antea USA, Inc.

Pitfall #1: Unclear understanding of the DealMaintenance & Environmental Acquisition Pitfalls

4Antea USA, Inc.

• Type of Transaction

• Asset portfolio

• Stakeholders and the Deal Team

• Liability Types and accountability

• Accessing asset information

• Confidentiality

• Seller provided information

• Asset inspection

• Reliable public sources of information

Educate yourself – Pre-planning considerationsUnderstanding the Deal

5Antea USA, Inc.

Pitfall #2: Overlooking liabilitiesMaintenance & Environmental Acquisition Pitfalls

6Antea USA, Inc.

Types of EHS Liabilities – know where to focusDefining Liabilities

7Antea USA, Inc.

ComplianceRemediation

Third Party Obligations Civil, Criminal & Punitive

Natural Resource Damage

Occupational H&S

Abatement

Typical Liabilities Based on Transaction TypeDefining Liabilities

8Antea USA, Inc.

Real Estate Acquisition

Business Unit Acquisition

Business Merger or Acquisition

Joint Venture, Leveraged Buyout

Credit Facility (Collateral)

Other Factors Affecting the EvaluationDefining Liabilities

9Antea USA, Inc.

Or…

Pitfall #3: Not all liabilities can be definedMaintenance & Environmental Pitfalls

10Antea USA, Inc.

Collecting InformationQuantifying Liabilities

11Antea USA, Inc.

1) Review of Seller-provided documents

2) Review of publicly available information

4) Visual inspection of selected assets

5) Visual inspection of all assets

7) Intrusive Assessments

3) Use Commercial Database Services

6) Phase I ESA (under ASTM)

• Typically in a data room

• May require the buyer to acknowledge that it has reviewed and accepted the seller’s information as complete disclosure.

• Important that the buyer review all information provided by the seller

1) Seller Provided DocumentationCollecting Information

12Antea USA, Inc.

PROS

• Inexpensive, fast, potential to identify wide range of property and corporate liabilities

• Can effectively communicate large amounts of data

• All parties have access to the same information

CONS

• Information controlled by Seller

• Difficult to verify and to glean relevant data

• Difficult to establish timelines and historical significance of documents

• Seller may limit ability to copy or download

• Seller can restrict time allowed for review in competitive bidding and auctions

• Obtained anonymously or through information requests (FOIA).

• If public-held company, utilize annual reports and SEC filings

• Regulatory Agency Databases and files through on-line access points or FOIA requests; Keyword and topical searches on-line; Local Government archives for historical and building information

2) Review publicly available informationCollecting Information

13Antea USA, Inc.

PROS

• Inexpensive if on-line or electronic means utilized

• Can be performed anonymously

• Buyer can control information sources

CONS

• Need key information about each asset

• Information is often incomplete or dated

• Proprietary data will not show in searches

• Cannot be anonymous if using FOIA request

• Some files must be viewed in-person

• Provide environmental and other types of information filtered by geographic coordinates (i.e. radius reports)

• Examples: EDR, ERS, ERIS

3) Commercial database servicesCollecting Information

14Antea USA, Inc.

PROS

• Meets requirements for AAI

• Maintains anonymity

• Search criteria widely accepted, repeatable, recognized, and consistent

• Ability to geocode the information saves considerable search time

• Some unique and proprietary databases are available

CONS

• Exact location information is needed

• Geocoding can be unreliable

• Can contain irrelevant and repetitive data

• Source databases don’t translate well

• Often incomplete or dated results

• Data on multi-tenant sites and government installations can be jumbled and confusing

• Visual inspection of selected representative assets

• Visual inspection of all assets

• Often performed in conjunction with historical reviews and databases

• Adds confidence to database searches

4) & 5) Visual InspectionsCollecting Information

15Antea USA, Inc.

PROS

• Most effective way to observe and confirm site information and operations

• Fills an important requirement to meet the standards for all appropriate inquiry

CONS

• Time consuming and expensive for teams to reach remote sites

• The brief inspection “snapshot” may not give a reliable picture of typical facility operation

• Confidentiality and anonymity are difficult to maintain

• Site-specific implementation of a program to collect samples of soil, ground water, surface water, building materials and other materials

• Testing could include equipment and structures (such as tanks)

7) Intrusive AssessmentsCollecting Information

16Antea USA, Inc.

PROS

• Reliable, conservative approach leaves little to speculation

• Results can inform further action and likely to be accepted by regulatory agency if action plan is needed

CONS

• Investigations can get expensive

• Time is needed which may not be practical within an aggressive due diligence period

• Competitive disadvantage in an auction bid

• Creation of affect media information could require disclosure to regulatory agencies;

• Potential damage and disruption of property

• Difficult to remain anonymous/ confidential

Collecting InformationQuantifying Liabilities

17Antea USA, Inc.

1) Review of Seller-provided documents

2) Review of publicly available info

4) Visual inspection of selected assets

5) Visual inspection of all assets

7) Intrusive Assessments

3) Use Commercial Database Services

6) Phase I ESA (under ASTM)

• Screen all documents made available by the Seller

• Use the level of materiality to focus on relevant liabilities

• Tabulate all material findings and liabilities and separate those that are accruable (can reserve)

• Speak the language of the decision makers

• What are costs?

• When and how will they be paid?

• Handling of non-compliance issues

Evaluating and Quantifying LiabilitiesQuantifying Liabilities

18Antea USA, Inc.

Pitfall #4: An ASTM Phase I is always requiredMaintenance & Environmental Acquisition Pitfalls

19Antea USA, Inc.

E1527-13

• Most common method for addressing potential liabilities where site inspections possible

• Evaluation process is widely recognized and accepted

• Buyers of real estate protected from Superfund liability by performing all appropriate inquiry (AAI), no benefits to leaseholders or Sellers

• Only satisfies the CERCLA AAI requirement

• Non-ASTM scope considerations must be added to identify compliance concerns and hazardous building materials

• Poorly-written evaluations can identify environmental conditions that are not significant or risky

Phase I Environmental Site AssessmentsQuantifying Liabilities

20Antea USA, Inc.

Pitfall #5: You can rely on previous Phase IsMaintenance & Environmental Acquisition Pitfalls

21Antea USA, Inc.

• Liability evaluation is project/client-specific –single point in time

Reliance by Multiple StakeholdersQuantifying Liabilities

22Antea USA, Inc.

• Risk tolerance levels are project/client-specific

• Reliance agreements are best negotiated at the beginning of a transaction so the requirements of all stakeholders can be considered

Pitfall #6: All consultants are created equalMaintenance & Environmental Acquisition Pitfalls

23Antea USA, Inc.

• This is not a time for commodity pricing

• There is no such thing as over-communicating

• When it comes to quantifying risk, question the certainty of a single number

• The “state” of compliance for assets/equipment is quantifiable

• They should have a plan for handling inconsistent data

• There are no standard “REC” categories

Key Considerations when hiring consultantsQuantifying Liabilities

24Antea USA, Inc.

Pitfall #7: This is a “one and done” projectMaintenance & Environmental Acquisition Pitfalls

25Antea USA, Inc.

• The Goal of IntegrationAlign the newly acquired EHS organization to the existing organization and culture while maintaining the necessary EHS programs

• Every transaction presents unique situations – the integration strategy must be flexible

• Integration is bigger than EHS team

• Leverage your Consultant to learn about the Seller’s EH&S team

The importance of Integration (for EH&S)Portfolio Integration

26Antea USA, Inc.

• Look at Management System functions as a guide

• Interviews with Key staff

• Identify important organization and procedural issues to review

• Establish some metrics

• Determine how identified liabilities will be handled

Preparing for IntegrationPortfolio Integration

27Antea USA, Inc.

• The due diligence assessment process may identify previously unknown liabilities (non-compliance and contamination) known only to the acquiring EHS Team

• Develop a corrective action plan

• Assign responsibilities

• Develop schedule for completion

• Determine non-compliance items that need to be disclosed to the agency

• The seller may be at risk if the buyer identifies liabilities that create an agency notification requirement

Post-transaction prioritiesPortfolio Integration

28Antea USA, Inc.

During your investigation, you identify a discoverable incident and your Contractor is legally obliged to report it.

During your investigation, you find historic use of “methyl-ethyl death” (something other than petroleum).

Example: a site used PCE historically and no investigation was conducted, was then bought/sold and now used as retail fuel operations. PCE impact could be out there. Do you assess for PCE? Would it vary by state? Would you use as potential leverage tool in liability quantification/purchase price negotiations? Ask for an indemnification?

The property has historic use of petroleum before UST Regs by EPA, and no subsurface investigations ever conducted.

During your site visit, you identify significant staining, numerous regulatory violations or releases that could be indicative of subpar management/compliance.

Same comment as above, but the state has LUST Trust Fund.

Other PitfallsMaintenance & Environmental Acquisition Pitfalls

29Antea USA, Inc.

B E T T E R B U S I N E S S , B E T T E R W O R L D℠

Antea Group Offices

USA Headquarters5910 Rice Creek Parkway, Suite 100St. Paul, MN 55126, USAUSA Toll Free: +1 800 477 7411 International: +1 651 639 9443

BelgiumRoderveldlaan 12600 Antwerpen

ColombiaCalle 35 No. 7-25, Piso 12Bogota, DC

France29 avenue Aristide Briand - CS 1000694117 Arcueil Cedex

NetherlandsMonitorweg 291322 BK Almere

www.anteagroup.com