1ageP and financial services, state/municipal •

•
• 

### Summary of EPA Webinars on Financial Responsibility for Geologic Sequestration Wells EPA provided the following disclaime r to the webinar participants: The purpose of this public webinar series is for information sharing, and views or opinions expressed during the presentati on 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 unde r 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 sequestrati on (GS) wells. The goal of the series was to encourage information sharing on potential financial mechan isms that well owners and operators could use to meet the financial responsibility requireme nts 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 we lls. The webinars addressed the following topics: Trust Funds, Letters of Credit, and Surety Bonds with Standby Tr ust Agreements (held on April 28, 2009). Insurance (held on May 20, 2009). Self-Insurance: Financial Test and Co rporate Guarantee (held on May 26, 2009). Collectively, about 100 people attended the webinars (many participants a ttended more than one webinar). The participants represented a range of organizations with in terest in and unique perspectives on financial responsibility for GS , including EPA regions, corporate, consulting, governments, energy/environmental non-profits, electricity providers (e.g., energy companies and utilities), and academia. Figure 1 presents the breakout of participants’ affiliations.
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 th e webinar series. Other, 5.7% Energy/Env Non-profit,

12.1% EPA Regions,

34.8%

Corporate/ onsulting/ Financial,

17.7%

State/Local Electricity Government, Academic, Providers, 13.5% 7.1% 9.2% C Figure 1: Webinar ParticipantsPage 2 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 proposedfinancial responsibility requirements (i.e., corrective action, injection well plugging, postinjection 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 Platt of EPA Region 3 presented “Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements.” Mr. Platt 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 i s 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 cer tain conditions and that funds will be paid into a standby trust. Mr. Platt described a surety bond as guarantee by a surety company that specified obligations, such as plugging of the well, will be fulfilled. Mr. Platt 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. Platt noted that a standby trust is not a stand

- alone financial in strument to guarantee financial responsibility, unlike a trust fund. For each mechanism, Mr. Platt 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 mo re 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 well s, 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 Ruh ter 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 •

•Page 3 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 descri bing 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 selfinsurance or the cost estimate may be represented in the fina ncial 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 a dded that , although historically there is a very low risk of failure associated with self

- in surance, 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 facilitat ed 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 pr ovided the following insights on the desirability of trust funds, letters of credit, and surety bonds fo r financial assurance for GS:

• The concern is not the financial mechanisms, but the risk that the y cover. The availability of these instruments will d epend 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 project s 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.)Page 4 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; th is 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 option s.

• 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 P rogram for UIC.

• Stand -by trusts are easy to obtain bec ause 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 b ond ratings might hav e 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, com panies, 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, there by 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.Page 5 Participants offered the following addi tional 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.

• Corporation s 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.

• Anothe r 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 manag ing 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 mutual s for insurance purposes, mutual companies may be reluctant to provide the high levels of coverage that may be necessary for GS projects.Page 6 • 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.

• An y 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 believe d 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 participa tions. 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 outs et 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 “p ure ” single

- owner insurance entities and “g roup” 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.Page 7 • Once demonstration projects are complete and industries become engaged at a commercial scale, mainline carriers w ill 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 re cognize the difference between covering liabilities versus covering activities such as well plugging and site closure. T he availability of multiple mech anisms could help keep costs down.

• Insurance probably works best for the operational phases of a facility, which does not involve unusual technologi es (with the exception of sequestering the carbon dioxide). Insurance becomes problematic during site cl osure 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 conce rn s 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 web inar , 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.Page 8 Participan ts 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 sho uld 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 corp orate 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 responsib le.

• 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, the y 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:

• T here are currently very few thi rd 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 limit ed if self -insurance is not an option.

• Several parti cipants 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 unk nowns related to financial assurance (e.g., site closure and care) can be solved later.Appendix A – Slide Presentations for the Three Webinars1 

### Webinar on Underground Injection Control (UIC) Program Applications 

## Trust Funds Letters of Credit and 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.

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 Platt, U.S. EPA, Region 3



###  Discussion Facilitator

 Vanessa Leiby, The Cadmus Group, Inc.

2 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

# Welcome

 First in a series of EPA webcasts to discuss 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 A g reements – A p ril 28, 2009

 Part 2. Insurance – May 20, 2009

 Part 3. Self Insuran ce: Financial Tests and Corporate Guarantee – May 26, 2009

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 

# Webinar on Financial Assurance Mechanisms: Disclaimer

The pp ur ose of this p ublic p resentation is for information sharing and views or opini ons 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 aut hority in the Safe Drinking Water Act to accept and use funds for financial assurance. fi Consequently,

nanc i a l the Agency cannot implem ec h i d ib d ent som

i th e of the fi i l assurance m h an i sms d escr ib ed in th ese webinars due to the requirement under the Miscellaneous Receipt Act to deposit funds EPA receives for the use of the Government into the Treasury.

4 Webinar on Financial Responsibility Instruments for GS Wells

### 

6 Webinar on Financial Responsibility Instruments for GS Wells 

###  R

 D

5 Webinar on Financial Responsibility Instruments for GS Wells 

# Purpose

eview

 Proposed financial responsibility requirements for GS

 Mechanisms available to meet the current requirements



### iscuss

 Trust funds

 Letters of credit

 Surety bonds

 Standby trust agreements (for letters of credit & surety bonds)



# Desired Outcome

At the end of this webinar s eries:

 Participants will have exchanged information on their experiences with th ese financial assurance instruments.

P ar ti ci pan t s w ill h ave s hared i nf orm a ti on on special considerations for meeting the unique needs of geologic sequestration wells.

Webinar on UIC Program Applications: Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements April 28, 2009



post-injection site care and site closure
8 Webinar on Financial Responsibility Instruments for GS Wells 

# Carbon Dioxide GS Rulemaking: Milestones

 Federal Requirements 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

Carbon Dioxide GS Rulemaking 

## : Proposed Financial Responsibility Requirements

The owner or o p erator 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 

## 



7 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, 200910 Webinar on Financial Responsibility Instruments for GS Wells 

## Carbon Dioxide GS Rulemaking: Summary

f Comments Received on Proposed Regulations o



##  E PA received received comments comments in the following following reas:

 Usefulness/ appropriateness of various instruments

 Improvements for some instruments

 Need for flexibility to encourage commercial scale development of CCS

 Need for guidance on fi nancial responsibility 

## a

Webinar on Financial Responsibility Instruments for GS Wells 9

Webinar on UIC Program Applications: Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements April 28, 2009 

## Presentation on Trust Funds, Letters of

Credit, and Surety Bonds with Standby Trust A g reements Stephen Platt, U.S. EPA, Region 3

# Phases of a GS Project

Siting Area of Review

and Corrective

Action Well Construction Injection/ Operation/ Monitoring Injection Well Plugging PostInjection Site Care

and Site Closure Long-Term Care

Emer gency and Remedial Response

11 Webinar on Financial Responsibility Instruments for GS Wells



# Available Mechanisms

Mechanisms

Third Party Instruments

Surety Bonds Letters of Credit Trust Funds Insurance Self Insurance Instruments

Financial

Test

Corporate Guarantee

12 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, 2009Webinar on UIC Program Applications: Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements April 28, 2009 14 Webinar on Financial Responsibility Instruments for GS Wells 

# Trust Funds

What is a trust fund? Note: Class I has specific requiremen ts under 40 CFR 144.63 and other well classes don’t. They follow the gen eral 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 an d i m p lem e n

tin g post

- clo sure activ ities

 For Class II, interest can go to owner/operator if the amount in the fund exceeds plugging/post closure co sts; otherwise, interest is reinvested

13 Webinar on Financial Responsibility Instruments for GS Wells



###  Invest deposited funds, with guidance from the owner/operato r

 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 

# Trust Funds: Current UIC Program Trustee Responsibilities

# Trust Funds: Current UIC Trust Requirements

 Trusts must meet the followin g q re uirements 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 th e trustee can invest the fund’s money
 It must designate EPA as the beneficiary.

 Be accom p anied b y a “certificate of acknowled g ement” Investin g deposited funds, with guidance from the owner/operator

 Specify conditions for authorizing payments or the return of fun

 Trustee must be free of conflicts of interest ds

15 Webinar on Financial Responsibility Instruments for GS Wells



# Trust Funds: Current UIC

Program Pay-In Periods

 The owner or operator operator ma y deposit deposit f unds 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 f actor in the possibility that the owner or opera tor may face financial distress prior to the trust being fully funded

16 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, 200918 Webinar on Financial Responsibility Instruments for GS Wells 

# Letter of Credit

What is a Letter of Credit? 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 i ns tit u ti on
 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



# Surety Bonds 17 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 

### What is a surety bond?

 Guarantee Guarantee by a surety com p any th a

t specified o bligations

bligations 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 elig ible 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/opera tor fails provide a substitute within 90 days

 Two types of surety bonds can demonstrate financial responsibility:

 Financial guarantee bond

 Performance bondsWebinar on UIC Program Applications: Trust Funds, Letters of Credit, and Surety Bonds with Standby Trust Agreements April 28, 2009 20 Webinar on Financial Responsibility Instruments for GS Wells 

# Types of Surety Bonds

 Performance Bond

 Di rec tl y ti ed t o con t rac t b et ween con t rac t or an d pro j ec t owne r

 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

19 Webinar on Financial Responsibility Instruments for GS Wells



## 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 providers22 Webinar on Financial Responsibility Instruments for GS Wells 21 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 

# Standby Trusts

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

 Un lik e a f un ded t rus t , a s t an db y t rus t i s no t a stand-alone financial in strument to guarantee financial responsibility



## Facilitated Discussion
Moderator: Vanessa Leib y, The Cadmus Grou p, Inc.
Please type in questions us ing the webcast question pane on your control panel, or you may respond by phone.24 Webinar on Financial Responsibility Instruments for GS Wells 

# Questions for Discussion

 What experience have you had with trust funds, letters of credit, and/or surety b d on s ?

 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?

 Wh at gu id ance s h ou ld E PA prov id e f or GS an d o th er we ll s?

 Describe your experience from the st ate/regional perspective with the management of trust funds, letters of credit, and/or surety bonds?

23 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 

# Questions for Discussion

 H ow we ll d o t rus t f und s, l e tt ers o f cre dit , an d sure t y b onds 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 appropriate , what constitutes an appropriate pay in period?

 Are standby trust agreements readily obtained?

# Thank You!

More information about the Geologic Sequestration equestration of Carbon Dioxide (CO 2 

### )

 EPA Geologic Sequestration of Carbon Dioxide Website: http://www.epa.gov/safewater/ui c/wells_seque stration.html

 Text of the P roposed

roposed rule for Federal Federal Requirements U nder t he UIC Program Program for Carbon Dioxide (CO 2 ) Geologic Sequestration (GS) Wells: http://www.epa.gov/fedrgstr/EPA-W ATER/2008/July/Day-25/w16626.pdf

 Docket for the rule: www.regulations.gov , Docket ID EPA-HQ-OW-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 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.



### Webinar on Financial Assurance Mechanisms: 

# Control Panel Navigation

2

Webinar on UIC Program Applications: Insurance May 20, 2009

### Webinar on Financial Assurance Mechanisms: 

# Overview

4 

###  Welcome Welcome

 Bruce Kobelski, U.S. EPA, Headquarters



###  Presentation on Insurance

 Charles Hernick, The Cadmus Group, Inc.



###  Discussion Facilitato r

 Vanessa Leiby, The Cadmus Group, Inc.

3

Webinar on UIC Program Applications: Insurance May 20, 2009 

### 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 . Ins u rance – Ma y 20 , 2009

 Part 3. Self Insuran ce: Financial Tests and Corporate Guarantee – May 26, 20096 

### Webinar on Financial Assurance Mechanisms 

## : 

# Disclaimer

 The purpose of this public presentation is for information sharing and views or opinions expressed during t he presentation belong to the speaker and do not necessarily represent the views and opinions of the U.S. EPA.

 EPA does not have express aut hority in the Safe Drinking Water Act to accept and use funds for financial assurance. Consequently, the Agency cannot implement some of the financial assurance assurance mechanismechanisms 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.

5

Webinar on UIC Program Applications: Insurance May 20, 2009 

### Webinar on Financial Assurance Mechanisms 

## : 

# Purpose

 Review of:

– Proposed financial responsibility requirements – Insurance mechanisms available to meet the requirements • Third Party Insurance • Captive Insurance


##  Facilitated Discussion on:

– E xper i ences us ing i nsurance

– When in the GS lifecycle insu rance may be most appropriate

– What type of guidance is needed8 

### 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.

 Partici p ants will have shared information on special considerations for meeting the unique needs of geologic sequestration wells.

7

Webinar on UIC Program Applications: Insurance May 20, 2009 

## 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



##  N o t i ce o f D at a A va il a bilit y: 2009

 Final rule expected 2010 or 201110 

## Carbon Dioxide GS Rulemaking: Proposed Financial Responsibility Requirements

 §146.85(a) The owner or operator must demonstrate and maintain financial res p onsibilit yand 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 mu st provide provide an adjustm ent 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

9

Webinar on UIC Program Applications: Insurance May 20, 2009 

### 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 f lexibility

lexibility to encourage to encourage c o

m

mer cial scale development of CCS

 Need for guidance on fi nancial responsibility

### Webinar on Financial Assurance Mechanisms



## Presentation on Insurance

Charles Charles Hernick Hernick , The Cadm us Group , Inc

.

11



### Webinar on Financial Assurance Mechanisms: 

# Phases of a GS Project

Siting Area of Review

and Corrective

Action Well Construction Injection/ Operation/ Monitoring Injection Well Plugging PostInjection Site Care

and Site Closure Long-Term Care

Emer gency and Remedial Response

12

Webinar on UIC Program Applications: Insurance May 20, 200914 

### Webinar on Financial Assurance Mechanisms: 

# Available Mechanisms

Mechanisms

Third Party Instruments

Surety Bonds Letters of Credit Trust Funds Insurance Self Insurance Instruments

Financial

Test

Corporate Guarantee

13

Webinar on UIC Program Applications: Insurance May 20, 2009 

### 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

– Thi rd P arty /C ommerc ial: I nsurance carr i er i s not affiliated with the insured party by ownership

– Captive Insurance: The insured company or companies share ownership of their insurance carrier

### Webinar on Financial Assurance Mechanisms: 

# Class I Hazardous Waste Wells

 Class I h

as specific requirem e nts under 4 0 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-clos ure include trust funds, surety bonds, letters of credit, insurance, proof of owner/operator financial responsibility, gua ranty of related party

15



### Webinar on Financial Assurance Mechanisms:



# Class I Hazardous Waste Wells

 InsuranceInsurance

 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 regu lat ory agency

 Amount of coverage to be equal to covered event

16

Webinar on UIC Program Applications: Insurance May 20, 200918 

### Webinar on Financial Assurance Mechanisms: 

# Class II Financial Instruments

 Class II wells follow a gene ral 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 tr ansferor 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)

17

Webinar on UIC Program Applications: Insurance May 20, 2009 

### 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 dem onst r at e 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 nam e d: surety bonds , trust funds, letters of credit, financial statements

 Insurance not specifically named in 1990 guidance20 

### Webinar on Financial Assurance Mechanisms: 

## Applicability of Insurance to GS

 There are current current third party policies written written f or GS

 Reflect underwriters’ assessment of risks:

– Pollution, business interruption, loss of well control, transmission of CO2, 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

19

Webinar on UIC Program Applications: Insurance May 20, 2009 

### Webinar on Financial A ssurance Mechanisms: 

## Applicability of Insurance to GS (cont.)

 Environmental Finance Advisory Board (EFAB) Recommendations on 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 po licy should have a rating of “secure” or better by AM Best or comparable rating agency

– The rating of the captive should be form ally reviewed by the rating agency annually, and States should be notified w ithin 30-days of a rating change, an outlook change, or a rating being placed under review

 Class I Hazardous Requirements: Carriers mu st “be licensed to transact the business of insurance, or eligible to provide insuran ce as an excess or surplus lines insurer,” in at least one state; no minimum rating

### Webinar on Financial Assurance Mechanisms: 

# Insurance for GS: Strengths

 Provides assurance to regulating agency

 Provides s ource of pay m ent to the insured o r

o

ther

parties 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 ma y not re q uire collateral or credit restrictions

 Allows for more competitive price and fewer restriction on capital

 Expands variety of mechanisms available

21



### 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 asse ssments of risk and payment

 All parties need to be well informed to make sure coverage is adequate

 C os t es ti ma t es may vary i n accuracy; l oo k at li m it of li a bilit y

 Delayed or denied payment of legitimate claims possible

 Ongoing debate about whether the legal separation implies sufficient financial separation for captive Insurance
22

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 s t d ui es f ocus on i nsurance

– Obtain private insurance or bonds from injection through postclosure

– Caps and premiums are risk-based and based on site performance

– Permitting for early projects coul d be regulated under modified UIC program with CCS-specific le gislation in place; individual applicants must show proof of financial resources for site care and reme di a ti on

– Alternative for early projects is Price Anderson model – individual insurance with liability cap using lower thresholds

23



### 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 s h ow proo f of compara bl e resources )

 Licensees are strictly liable for “extraordinary nuclear occurrences”

24

Webinar on UIC Program Applications: Insurance May 20, 2009

### Webinar on Financial Assurance Mechanisms:



## Facilitated Discussion
Moderator: Vanessa Leiby, The Cadmus Group, Inc.
Please type in questions us ing the webcast question pane on your control panel, or you may respond by phone.

25



### Webinar on Financial Assurance Mechanisms: 

# Control Panel Navigation

26

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? W h y or w h y 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? 27



### 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? Siting Area of Review

and Corrective

Action Well Construction Injection/ Operation/ Monitoring Injection Well Plugging PostInjection Site Care

and Site Closure Long-Term Care

Emergency and Remedial Response

28

Webinar on UIC Program Applications: Insurance May 20, 2009

### Webinar on Financial Assurance Mechanisms: 

# Thank You!

More information about the Geolo g ic Se q uestration of Carbon Dioxide (CO 2 

### )

 EPA Geologic Sequestration of Carbon Dioxide Website: http://www.epa.gov/safewater/ui c/wells_seque stration.html

 Text of the Proposed rule for Federal Requirements Under the UIC Program for Carbon Dioxide Dioxide (CO 2 ) Geologic Geologic S equestration

equestration ( GS) W e lls: http://www.epa.gov/fedrgstr/EPA-W ATER/2008/July/Day-25/w16626.pdf

 Docket for the rule: www.regulations.gov , Docket ID EPA-HQ-OW-2008-0390

29

Webinar on UIC Program Applications: Insurance May 20, 2009

### Webinar on Underground Injection Control (UIC) Program Applications 

# Self-Insurance: Financial Test and C t G t C orpora t e G uaran t ee

May 26, 2009

h bl f f h l T

h is pu bl ic presentation is f or in f

ormation s h aring on l y. 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.



### Webinar on Financial Assurance Mechanisms: 

# Control Panel Navigation

2

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009

### Webinar on Financial Assurance Mechanisms: 

# Overview

 Welcome

 Joseph Tiago, U.S. EPA, Headquarters Headquarters

 History of RCRA Subtitle C Financial Test

 Dale Ruhter, U.S. EPA, Headquarters

 Presentation on Self-Insurance

 Pl au B a il ey, ICF I nt erna ti onal

 Discussion Facilitator

 Vanessa Leiby, The Cadmus Group, Inc.

3



### 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

 Pt ar 2

. I nsurance – M ay 20 , 2009

 Part 3. Self Insurance: Financial Test and Corporate Guarantee – May 26, 2009

4

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 20096 

### Webinar on Financial Assurance Mechanisms 

## : 

# Disclaimer

 The purpose of this public presentation is for information sharing and views or opinions expressed during t he presentation belong to the speaker and do not necessarily represent the views and opinions of the U.S. EPA.

 EPA does not have express aut hority in the Safe Drinking Water Act to accept and use funds for financial assurance. Consequently, the Agency cannot implement some of the financial assurance assurance mechanismechanisms 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.

5

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms 

## : 

# Purpose

 Review of:

 Proposed financial responsibility responsibility requirem requirem ents

 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 se lf-insurance may be most appropriate

 What type of guidance is needed8 

### 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

7

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms: 

## CO 2 

## 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



##  N o t i ce o f D at a A va il a bilit y: 2009

 Final rule expected 2010 or 201110 Webinar on Financial Assurance Mechanisms: 

## CO 2 

## GS Rulemaking: Proposed Financial Responsibility Requirements

 §146.85(a) The owner or operator must demonstrate and maintain financial res p onsibilit yand 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 mu st provide provide an adjustm ent 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

9

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 Webinar on Financial Assurance Mechanisms: 

## CO 2 

## 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 f Need for flexibility lexibility to encourage to encourage c o

m

mer cial scale development of CCS

 Need for guidance on fi nancial responsibility12 

### Webinar on Financial Assurance Mechanisms



## Presentation on History of RCRA Subtitle C Financial Test
Dale Ruhter, U.S. EPA, Headquarters

11

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms 

## RCRA Subtitle C Financial Test: Background

 The current financial test used in the RCRA Subtitle C program was i nitially nitially prom ulgated ulgated i n 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 obtaini ng a third-party instrument

 The test was developed based on criteria o f p erform

ance, availability, and public and private costs

 A summary of the RCRA Subtitle C financial test for closure and post-closure is below

### Webinar on Financial Assurance Mechanisms 

## RCRA Subtitle C Financial Test: Usage

 The financial test and corporate guarantee cover an estimated: estimated:

 37% of the Treatment, Storage, or Disposal facilities (TSDs), and

 56% of the TSDs’ RCRA closure and postclosure obligations

 Financial tests sim ilar t o

t hat for RCRA Subtitle C closure and post-closure are also used by other programs, such as Class I UIC facilities for plugging and abandonment

13



### Webinar on Financial Assurance Mechanisms 

## RCRA Subtitle C Financial Test: Subsequent Developments

 The Agency f irst 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 s ubset of hazardous waste facilities (those operating under a RCRA standardized permit)

14

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 200916 

### Webinar on Financial Assurance Mechanisms



## RCRA Subtitle C Financial Test for Closure and Post-Closure

 RCRA Subtitle C Financia l 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 p os t -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 current plugging and abandonment cost estimates 15

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms



## RCRA Subtitle C Financial Test for Closure and Post Closure

 RCRA Subtitle C Financia l Test – Alternative II

 A current rat i ng for t h e most recent b on d i ssuance of AAA, AA, A, or BBB as issued by Standard & Poor’s or Aaa, Aa, 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 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 current plugging and abandonment cost estimates

### Webinar on Financial Assurance Mechanisms



## Presentation on Self-Insurance: Financial Test and Corporate Guarantee

Paul Bailey, ICF International



### Webinar on Financial Assurance Mechanisms: 

# Phases of a GS Project

Siting Area of Review

and Corrective

Action Well Construction Injection/ Operation/ Monitoring Injection Well Plugging PostInjection Site Care

and Site Closure Long-Term Care

Emer gency and Remedial Response

18 17

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 Mechanisms 

### Webinar on Financial Assurance Mechanisms: 

# Available Mechanisms

Third Party Instruments Self Insurance Instruments

Surety Bonds Letters of Credit Trust Funds Insurance Financial Test

Corporate Guarantee

19



### Webinar on Financial Assurance Mechanisms: 

# Self-Insurance Models

 Class II Self Insurance Class II Self

- Insurance

 Class I Self-Insurance

20

### Webinar on 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

21



### Webinar on Financial Assurance Mechanisms: 

## Class II Guidance Financial Coverage Criteria

 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 # 67, May 9, 1990)
22

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms: 

## Class II Guidance Bond Rating Alternative

 Most r used to raise recent ating on bonds 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

23



### W ebi nar on Financial Assurance Mechanisms: 

# Class II Guidance Financial Tests

T y p e of Ra tio Fo r m u l a T h r esh old 1) De Eq u i ty Cu rren t Li ab i l i t i e s < 1 0

bt

- Ra t i o Net W o rth < 1

. 0 2) De bt-E qu i t y Long T erm L i ab i l i t i e s Net W o rth < 2

. 0 3) L i qu i d i ty Cu rren t A s se ts -C urr e n t L i a b i l i t i e s To t a l A s se ts > - 0

. 1 0 4) Ca sh R et u rn on L i ab i l i t i es Ne t I nc om e + D eprec i at i o n + D epl e t i o n + A m ort i z at i on T o t a l L i a b ili t i e s > 0

. 1 0 Tota l L i ab i l i t i es 5) Ne t P r of i t Re ve nues - E x pe ns es > 0

(Source: EPA UIC Program Guidance # 67, May 9, 1990)

24

### Webinar on Financial Assurance Mechanisms: 

# Class II Financial Test Submission

 Provide Provide either: either:

 A full auditor’s opini on from independent Certified Public Accountant (CPA)

 A "Glossy" financial statement

 A 10K Report, submitted to the Securities and Exchange Commission

 A Federal Energy Regulat ory Commission Form 2 Report (Source: EPA UIC Program Guidance # 67, May 9, 1990)

25



### Webinar on Financ ial Assurance 

## Mechanisms: Class II Guidance Corporate Guarantee

 Ma y be issued b y a lar ge p arent cor p oration 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 authori zed to legally bind the parent

 Presumably, parent must pass all 5 financial tests (Source: EPA UIC Program Guidance # 67, May 9, 1990)

26

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 200928 

### Webinar on Financial Assurance Mechanisms: 

# Class I Self -Insurance

 Self-insurance option is spelled out at 40 CFR 144 Subpart F , s pecifically

pecifically § 144

. 63(f)

 Must satisfy one of two financial 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))

27

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms: 

# Class I Financial Test Alternative I

 Two of the following three ratios:

 Total L iab ilities / Net W o

r

t h < 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))30 

### Webinar on 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

 A sse t s i n U .S a t l eas t 90% of t ot al asse t s or at least 6 times the cost estimate
(Source: 40 CFR 144.63(f)(10))

29

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms: 

## Class I Corporate Guarantee

 Written guarantee guarantee by parent following following specified terms

 Parent must satisfy self-insurance r equ ir e me n ts

(Source: 40 CFR 144.63(f)(10))

### Webinar on Financial Assurance Mechanisms: 

## Role of Cost Estimate

 Class II (no role) vs . Class I hazardous hazardous (included in “multiples”)

 RCRA financial tests use either site-specific or categorical cost information

 U nlike other mechanisms , not limited to the amount of assurance

31



### Webinar on Financial Assurance Mechanisms:



## Potential Strengths of Self Insurance

 HistoricallyHistorically - Very low risk o f failure 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 b ankrupt

ankrupt four tim four tim es m o

re frequently frequently than firm s with tangible net worth greater than $10 million



### .


##  Low cost (annual documentation)

32

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms: 

## Potential Weaknesses of Self Insurance



##  No guarantees

 Risk of inadequate or excessive oversight

33

34 

### Webinar on Financial Assurance Mechanisms:



## Facilitated Discussion
Moderator: Vanessa Leiby, The Cadmus Group, Inc.
Please type in questions us ing the webcast question pane on your control panel, or you may respond by phone.36 

### Webinar on Financial Assurance Mechanisms: 

## Control Panel Navigation

35

Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms: 

## Questions for Discussion

 Should self-insurance or corporat e guarantees be considered for fi nanc i al assurance f or GS? W h y or w h y not ?

 What experiences have you had with self-insurance or corporate guarantees for GS or other related industries?

 Can/should specific procedures fo r self-insurance or corporate guarantees be established in the GS rule?

 If self-insurance or corporate gua rantees are considered for GS, what type of guidance should be available?

 I s a tang ibl e net wort h th res h o ld o f $10 m illi on su ff i ci ent f or GS projects? Why or why not?

 With respect to GS wells what are your potential concerns with Financial Tests?Webinar on UIC Program Applications: Self-Insurance: Financial Test and Corporate Guarantee May 26, 2009 

### Webinar on Financial Assurance Mechanisms: 

## Questions for Discussion

 Does self insurance or corporate guarant ees m a ke m o re sense for a financial responsibility dem onstrati on during one phase (or all phases) com p ared to other m echanism s? Siting Area of Review

and Corrective

Action Well Construction Injection/ Operation/ Monitoring Injection Well Plugging PostInjection Site Care

and Site Closure Long-Term Care

37 Emergency and Remedial Response



### Webinar on Financial Assurance Mechanisms: 

# Thank You!

More information about the Geolo g ic Se uestration of q Carbon Dioxide (CO 2 

### )

 EPA Geologic Sequestration of Carbon Dioxide Website: http://www.epa.gov/safewater/ui c/wells_seque stration.html

 Text of the Proposed rule for Federal Requirements Under the UIC Program for Carbon Dioxide (CO ) G eologic S equestration ( GS) W ells:

38 Carbon Dioxide (CO 2 ) Geologic Sequestration (GS) W e lls: http://www.epa.gov/fedrgstr/EPA-W ATER/2008/July /Day -25/w16626.pdf

 Docket for the rule: www. regulations. gov , Docket ID EPA-HQ-OW-2008-0390