Category: Environmental Law

Environmental Review Commission Holds Final Meeting Prior to Start of 2014 Short Session

Poyner Spruill

It seemed fitting that the Environmental Review Commission (the Commission), met yesterday, Earth Day, for its last scheduled meeting before the start of the 2014 short session.  Yesterday’s meeting was chaired by Representative Ruth Samuelson.  The Commission heard presentations from Tom Reeder, Director of the Division of Water Resources at DENR, Paul Newton, North Carolina State President of Duke Energy, Edward Finley, Jr., Chairman of the North Carolina Utilities Commission, and Chris Ayers, Executive Director of the North Carolina Utilities Commission Public Staff.  At the close of the meeting the Chairwoman entertained public comment for close to an hour.

Duke Energy presented its support for a coal ash plan that could potentially incorporate several options into one solution and addresses, not only the Dan River, but other active and retired sites.  Duke Energy presented three scenarios to the committee.  The first plan, costing $2.0-2.5 billion, 1) incorporates the use of hybrid caps in places of the closure of some sites, 2) moves some sites to new lined structural fills or landfills, 3) continues the Asheville structural fill, and 4) converts some sites to dry fly ash.  The second plan, costing $6.0-8.0 billion, would incrementally excavate ash from 10 sites to landfills over a 20 to 30 year period.  The third plan, costing $7.0-10.0 billion, would incrementally move the ash to all-dry pneumatic bottom ash handling systems and include the thermally-driven evaporation of other process water.  Mr. Newton stated Duke believed the answer was somewhere between the first and second options.

The Sierra Club, the Roanoke River Basin Association, and the Catawba Riverkeeper, among several others, offered their comment.

The Sierra Club urged that the General Assembly set minimum standards for the closure of coal ash ponds such that Duke Energy could propose alternatives that adequately demonstrate effective protection of water supplies.  The Sierra Club also asked the legislature to bring coal ash under its waste management laws, since North Carolina is the only state that does not treat wet coal ash as solid waste.  Finally, the Sierra Club asked legislators to regulate structural fills and require liners and groundwater monitoring when coal ash is used as structural fill.

Other speakers asked the Commission to require the drainage and removal of coal ash from all open coal ash pits and the storage of all coal ash in dry, sealed above-ground containers or the reuse of the ash in products such as concrete.

The Commission did not take any votes and did not introduce any potential legislation.  The Commission had previously met on April 9th of this month and voted to approve its final report for the 2014 short session, which includes the Commission’s legislative proposals.

Article By:

Jillian DeCamp
Of:
Poyner Spruill LLP

2nd Conflict Minerals Reporting and Supply Chain Transparency – June 23-25, Chicago, IL

The National Law Review is pleased to bring you information about the 2nd Conflict Minerals Reporting and Supply Chain Transparency Conference, June 24-25, 2014, presented by Marcus Evans.Conflict-Minerals-250-x-250

Click here to register.

Where

Chicago, IL

When

June 24-25, 2014

What

The 2nd Sustaining Conflict Minerals Compliance Conference will break down each SEC filing requirement as well as examine direct filing examples from specific companies. Discussions will tackle key issues including refining conflict minerals teams to create a more successful conflict minerals management program, managing and developing consistent communication within the supply chain, and building an IT program that will continue to secure data from the various levels of the supply chain.

This conference will allow organizations to benchmark their conflict minerals management program against their peers to more efficiently meet SEC expectations and amend their program for future filings. Seating is limited to maintain and intimate educational environment that will cultivate the knowledge and experience of all participants.

Key Topics
  • Scrutinize the Securities and Exchange Commission (SEC) requirements and evaluate external resources for a more efficient conflict minerals rule with Newport News Shipbuilding, Huntington Ingalls Industries
  • Engineer a sustainable conflict minerals program for future filings with Alcatel-Lucent
  • Integrate filings and best practices from the first year of reporting with BlackBerry
  • Maintain a strong rapport with all tiers of your supply chain to increase transparency with KEMET
  • Obtain complete responses moving throughout the supply chain with Global Advanced Metals

Register today!

EPA’s Proposed Waters of the U.S. Rule: Does It Regulate Puddles? – Environmental Protection Agency

Bracewell & Giuliani Logo

In a leaked draft, EPA was seen to have been contemplating explicitly excluding puddles from regulation, but, in the end, didn’t do so. EPA provided an explanation as to why, but the rule is so broad, we think EPA’s explanation may not be completely relevant. In other words, because the rule is so broad, many puddles actually might fall under federal jurisdiction. The reason is the host of new definitions proposed by EPA. Previously undefined terms like tributary, neighboring, and floodplain are all now defined, and in a way that creates a web of federal jurisdiction. Here’s how:

  1. The rule starts with an initial list of jurisdictional areas, which includes (a) waters that are, have been, or could be used in interstate commerce, (b) interstate waters, and (c) the territorial seas.
  2. The rule then adds to this list all tributaries of these waters. Tributary gets defined for the first time as any feature with a bed and bank that contributes flow to any water on the initial list. Many features, like dry arroyos and mountain channels, have bed and bank even though they only flow when it rains or the snow melts:
  3. The rule then continues, adding to the list of jurisdictional waters all waters that are adjacent to the initial waters and their tributaries. Adjacent is “bordering, contiguous or neighboring.”
  4. EPA then defines neighboring for the first time to include any water in the floodplain or a riparian area of the initial waters and their tributaries. These also get new definitions. Floodplain is an area along a water, formed by sediment deposition and inundated during moderate to high flows. Riparian area is one bordering any water where surface or groundwater “directly influence the ecological processes and plant and animal community structure in that area.”

The end result is that areas are jurisdictional, as far upstream as one can find a bed and bank, and as far outward from that bed and bank as the area “directly influences” the area’s ecology or is formed by sediment and gets inundation from high flows. That is a lot of area. To give you a sense of the potential breadth of areas “subject to inundation,” this map shows in blue the flooding along the Mississippi River in 2011 and the counties/parishes at risk of significant flooding:

Fully one-third of Arkansas was covered. One half of the counties in Illinois were at risk.

This brings us back to puddles. In the proposal’s preamble, EPA says it removed puddles from the “not jurisdictional” list for clarity, not to imply they are jurisdictional.

Some puddles, it says, are not jurisdictional. The language of the rule, however, suggests that puddles are arguably jurisdictional if they are in floodplains or riparian areas. The fact that puddles aren’t always wet may not be decisive: EPA considers streams which flow only when it rains or snow melts to be jurisdictional and identifies dry features as “water”:

We’re not saying that EPA would take the position that puddles are jurisdictional – our only point is that the language of the proposed rule is so broad that it could. And we haven’t even started on the “significant nexus” test.

This is the second in a series of posts regarding EPA’s proposed rule redefining “waters of the United States” under the Clean Water Act.

For Part One, click here.

Photo credits, from top: Photo of the Las Cruces Arroyo from Wikipedia. Mississippi River map from the US Census Bureau. Photo of a wetland from the Arid West Region Regional Supplement to the Corps’ Wetland Delineation Manual.

Article By:

Lowell M. Rothschild
Of:
Bracewell & Giuliani LLP

California Announces Initial Draft Priority Products Under California Safer Consumer Products Regulations

Beveridge Diamond Logo

On March 13, 2014, the California Department of Toxic Substances Control (“DTSC”) announced the first set of draft priority products that, if finalized, will be subject to the requirements of the California Safer Consumer Products (“SCP”) Regulations.

Notably, while DTSC had legal authority to identify up to five products, it chose to identify only three draft priority products at this time. The three products are:

  1. Children’s Foam Padded Sleeping Products containing the flame-retardant chemical, Tris (1,3-dichloro-2-propyl phosphate) or (“TDCCP”). Such products include nap mats and cots, travel beds, bassinet foam, portable crib mattresses, play pens, and other children’s sleeping products. In its press release announcing the draft priority products, DTSC asserted that TDCCP is a known carcinogen, is released from products into air and dust where it can be absorbed, inhaled, or transferred from hand to mouth, and has been found in California waters and sediments. DTSC also noted that there is no legal requirement applicable to these products that would require them to be made with flame retardants. For more information on DTSC’s selection of this draft priority product, click here.
  2. Spray Polyurethane Foam (“SPF”) Products containing Unreacted Diisocyanates. SPF products are used for home and building insulation, weatherizing and sealing, and roofing. DTSC asserted in its press release that exposure to wet or “uncured” SPF materials can contribute to occupational asthma and noted that unreacted diisocyanates are a “suspected” carcinogen. DTSC expressed its concern for populations using these products that are not protected by Occupational Safety & Health Administration regulations, such as independent contractors and people performing their own home repairs. In its press release, DTSC noted that currently there are no alternatives to unreacted diisocyanates for spray-foam applications. For additional information from DTSC on this draft priority product, click here.
  3. Paint and Varnish Strippers containing Methylene Chloride. Methylene chloride is a well-known and widely used solvent in paint strippers. According to DTSC, when metabolized, methylene chloride converts to carbon monoxide, which is acutely toxic to the brain and nervous system. DTSC claimed that alternative products without methylene chloride are readily available. For more information on this draft listing, click here.

In announcing the “draft list” of proposed priority products, DTSC emphasized that the naming of these products does not constitute a ban on the products, but rather the initiation of process to examine whether the chemicals of concern used in these products are “necessary” or may be replaced with safer alternatives. To put the draft priority products announcement in context, this announcement begins the second of four steps established by California’s SCP Regulations for identifying, prioritizing, and evaluating the use of chemicals and their alternatives in consumer products. The four steps include:

  1. Identification of Candidate Chemicals. The final SCP Regulations promulgated by DTSC include an initial list of candidate chemicals (~1,200), which DTSC later pared down to an informational “initial” list of fewer than 200 candidate chemicals that exhibit a hazard trait and/or environmental or toxicological endpoint.
  2. Identification of Priority Products. The SCP Regulations require DTSC to evaluate and prioritize product/candidate chemical combinations and to develop a list of priority products for which alternatives analyses must be conducted. Once a candidate chemical is the basis for a priority product listing, it is considered a chemical of concern. March 13’s announcement identifies the first product/candidate chemical combinations that DTSC is proposing to subject to the procedural process outlined in the SCP Regulations.
  3. Alternatives Analysis. Responsible entities of a product listed as a priority product must perform an alternatives analysis to determine how best to limit exposures to, or the level of adverse public health and environmental impacts posed by, the chemicals of concern in the product.
  4. DTSC Regulatory Response. The SCP Regulations provide a range of potential regulatory responses that DTSC may require after review of the alternatives analysis. These include provision of information for consumers (such as safe handling or instructions to limit exposure), restrictions on the use of chemicals of concern in the products, sales prohibition, engineered safety measures, and end-of-life management requirements. DTSC may require regulatory responses for a priority product (if the responsible entity decides to continue producing and distributing the priority product to the California market), or for an alternative product selected to replace the priority product.

Applicability

The SCP regulatory requirements apply to businesses (“responsible entities”) that manufacture, import, distribute, sell or assemble consumer products[1] identified by DTSC as priority products that are placed into the stream of commerce in California. Responsible entities are defined to include manufacturers, importers, retailers and assemblers. The SCP Regulations assign the principal duty to comply with the requirements to manufacturers. If a manufacturer does not comply with its obligations with regard to a priority product, DTSC may notify an importer, retailer or assembler of its duty to meet the requirements with respect to the priority product. Even if not called on to conduct an alternatives analysis, importers, assemblers and/or retailers of priority products may be impacted by regulatory responses selected by DTSC after the manufacturer’s completion of the alternatives analysis (e.g., if DTSC imposes a sales prohibition or requires additional information to be provided to the consumer at the point of sale) .

Requirements for Responsible Entities

Once the draft priority products are formally proposed and finalized through a public rulemaking process (which may take up to one year), responsible entities will be required to:

  • Within 60 days after finalization of the final priority products list, notify DTSC that the responsible entity makes or sells a priority product (DTSC will post information obtained from notifications, including the names of the responsible entities as well as the product names, on its web site);
  • Within 180 days after finalization of the final priority products list, prepare a Preliminary Alternatives Analysis[2] to determine how best to limit exposures to, or the level of adverse public health and environmental impacts posed by, the chemicals of concern in the product; and
  • Within one year after DTSC issues a Notice of Compliance for the Preliminary Alternatives Analysis, prepare a Final Alternatives Analysis.

Next Steps

Those that manufacture, sell, use, or otherwise have an interest in the draft priority products may wish to submit comments to DTSC as part of the priority product listing process. DTSC will follow a formal rulemaking process to finalize the draft priority products, which will take up to a year after the products are formally proposed. DTSC plans to hold several workshops in May and June of 2014 before publishing the notice of proposed rulemaking and opening the public comment period. Stakeholders will then have the opportunity to weigh in on whether, and how, the proposed priority products will be regulated by DTSC.

If your products were not among the three proposed priority products,stay tuned: By October 1, 2014, DTSC is required to issue a Priority Product Work Plan that identifies and describes the product categories that DTSC will evaluate to select priority products for the three years following the issuance of the Work Plan (roughly from 2015 to 2017). DTSC intends the Work Plan to serve as a signal to consumers and the regulated community as to the categories of products it will examine next.

Once DTSC finalizes the initial priority product listings (anticipated late summer or early fall of 2015), responsible entities will be required to meet a series of deadlines for notification and submission of alternatives analysis reports outlined above. Manufacturers of draft priority products should engage their supply chain partners to evaluate options prior to finalization of the priority product listings. Note that manufacturers that choose to reformulate products prior to finalization of the priority product listing will not be subject to the DTSC notification or alternatives analysis requirements.

[1] “Consumer product” is defined for purposes of the California Safer Consumer Products regulations to mean “a product or part of the product that is used, brought, or leased for use by a person for any purposes.” Cal. Health & Safety Code § 25251(e). Certain limited products, such as dental restorative material or its packaging, prescription drugs or devices and their packaging, medical devices and their packaging, food, and federally registered pesticides, and mercury containing lights are excluded from the definition of consumer product.

[2] DTSC is currently developing an alternatives analysis guidance document to assist responsible entities in carrying out their obligations under the SCP Regulations. As of March 13, 2014, the guidance is still in development. DTSC anticipates that it will be released sometime before the first set of priority products is finalized.

Article By:

 
Of:

 

Letters Of Intent For On-Site Solar Energy Transactions

Sills-Cummis-Gross-607x84

An increasing number of retail, office, industrial and warehouse/distribution property owners are utilizing electricity generated by on-site photovoltaic (also referred to as “pv” or “solar”) systems to meet a portion of their properties’ electrical energy needs. The pv systems can be located on the roofs of buildings, in parking fields, on open areas of the property or on two or more of these locations.

One of the most common methods that property owners are using to obtain such on-site solar-generated electricity is to enter into a power purchase agreement, often referred to as a “PPA,” with a solar developer, frequently referred to as a “provider.” In a PPA, the property owner, often called a “host,” provides leasehold or license rights on its property to the provider for the installation and operation of the pv system, and the provider sells the electricity that the pv system generates to the host. The provider generally owns all of the governmental and utility company incentives provided in connection with the pv system, and the host usually owns the net metering rights for the pv system.

However, the negotiation of a PPA frequently takes more time and is more complex than the economic benefits of the PPA to the provider and the host warrant. One of the major reasons for this problem is that the typical initial letter of intent (“LOI”) for a PPA transaction frequently fails to address the issues that often cause the most difficulty when the host and provider attempt to negotiate and finalize the PPA itself. The balance of this article sets forth several of these additional issues that should be included in a PPA LOI and explores methods of ameliorating the conflicts they create between the provider and the host.

Electricity Rate Cap

Many LOIs include a cap on the rate that the provider will charge the host for the electricity that the pv system generates. The cap usually provides that the rate that the provider charges to the host cannot exceed the rate that that host’s regulated local electrical utility, referred to in this article as the “Utility,” or the host’s third-party power supplier, charges the host for electricity at the property in question.

However, in setting this cap, it is important to remember that the Utility charges the host, whether or not the host also has a third-party power supplier, for many items other than the electricity itself, some of which are based on electricity consumption and some of which are static. Accordingly, when the host and provider agree on the rate cap in the LOI, they should clearly state what portions of the Utility and third-party power provider rate are included in determining the cap.

Interconnection Agreement

In order to operate a pv system and to obtain net metering for the excess electricity that the pv system generates, the Utility requires that its customer, usually the host, sign an interconnection agreement. The terms of the interconnection agreement are set forth in the Utility’s tariff and are, hence, non-negotiable. While the host must sign the interconnection agreement, most of the undertakings in the interconnection agreement are the responsibility of the provider under the PPA. Accordingly, the LOI should provide that the host will sign the interconnection agreement and that each party will agree to perform its obligations under the interconnection agreement, while indemnifying the other party for its failure to do so.

Purchase Of Excess Electricity

Pv systems by their nature cannot provide all of a property’s electricity needs all of the time. Additionally, in most jurisdictions, either the Utility or a government regulator limits the size of the pv system, so that it will not generate more than a maximum percentage (for example, 80 percent) of a property’s electricity usage. However, notwithstanding these circumstances, there are times when the pv system will generate more electricity than the property is using, causing the Utility meter to run backwards, referred to as “net metering.” In many jurisdictions, usually by means of the interconnection agreement, the Utility will pay the host or credit the host’s future electric bills for the amount of this excess electricity.

For this reason, most PPAs provide that the host will purchase all of the electricity the pv system generates and own all the net-metering credits. However, before entering into a PPA, a host should review its third-party electricity supply contracts to make sure that they do not contain prohibitions against pv or other on-site systems or do not contain minimum usage requirements. The PPA and LOI should

also address the situation where the property becomes vacant, because most net-metering programs have limitations on how much excess electricity the Utility has to buy.

Electricity Production Guaranty

Many hosts assume, in their financial planning for a property’s operation, that the pv system will generate a minimum amount of electricity in each calendar year. Accordingly, they request a production guaranty. If the host wants a production guaranty, this should be set forth in the LOI. Additionally, the adjustments to the guaranty for weather, system shutdowns and force majeure events should be spelled out.

Taxes

Many jurisdictions provide limited sales and use tax exemptions on the sale of electricity from on-site pv systems and exclusions from increases in real property taxes by reason of their location on a property. However, other jurisdictions do not provide such exemptions or the exemptions are very narrow and do not apply to every situation. Accordingly, the host and provider should determine whether or not a tax exemption exists or applies before they enter into a LOI. If the exemption is available, the LOI should set forth which party is responsible for obtaining it. If no exemption applies, the LOI should set forth which party is responsible for the particular tax.

SNDAs

Most properties are subject to mortgage secured debt. Under the Uniform Commercial Code, as adopted in most jurisdictions, the PPA can provide that the pv system is the personal property of the provider, not a fixture, and thus not subject to the lien of the mortgage on the property. However, most loan and security agreements for most mortgages also provide for security interests in the personal property located at the property. The language in these documents is often extremely broad. Additionally, the provider needs access rights over the property to install and repair the pv system and rights to place the pv system on the property. PPAs generally provide these rights as leasehold or license rights. Finally, many mortgages require mort- gagee consent for the installation of pv systems on the property.

Accordingly, the LOI should set forth whether or not, and at whose cost, the host will obtain subordination, non-disturbance, attornment and lien waiver agreements (“SNDAs”) from all current and future holders of mortgages on the property. Such a provision can provide for the sharing of the cost to obtain the SNDA between provider and host, with a waiver or cancellation option if the cost exceeds a certain amount.

Non-interference With PV System And Property Access

Many retail tenants, in particular, have consent rights over the roofs of their stores, rights to install HVAC systems and antennas on their roofs and exclusive rights over certain parking lots and common areas. The provider cannot allow its pv system to be moved, damaged or shaded. Additionally, the provider needs laydown, storage and parking areas for its installation, repair and maintenance of the pv system. Accordingly, the LOI should address tenant consents and lease and OEA amendments, if required, in order to insure non-interference with the pv system and necessary provider access. The LOI should also address which party is responsible for obtaining the consents and access and non-interference rights and at whose cost. Additionally, the LOI can provide for a non-penalty termination of the PPA if these consents and rights cannot be obtained.

Temporary PV System Relocation, Removal Or Shutdown Most PPAs have a term of 15 to 20 years. During such a time period, roofs often have to be repaired and parking lots resurfaced. The cost to relocate or temporarily remove and reinstall a pv system is significant. Additionally, the cost to the provider in lost electricity revenue and more importantly lost incentive revenue can be substantial. Accordingly, the LOI should set forth which party will bear these costs or how they will be shared. Cost sharing may shift later in the term of the PPA because the provider’s loss of incentive revenues will likely be less and the need for repairs will be more likely to occur.

PV System Purchase Options

If the PPA is going to provide for a purchase option, the LOI should address at what times in the term the host can exercise its option and set forth the method for determining the fair market value of the pv system at the time of the exercise of the option, including what factors will be used in determining the value of the pv system.

Assignment

The LOI should state when, under what terms and to whom the parties can assign their rights under the PPA and whether a party and, if applicable, its guarantor, remains obligated under the PPA after an assignment.

Limitations On Liability

The LOI should specify whether the parties will be responsible for consequential damages, whether there will be absolute limitations on all damages, including indemnification obligations, and the dollar amount of these limitations.

Parental Guaranties

Most pv systems are owned through a single-purpose entity whose only asset is the pv system, and most shopping centers are owned by single-asset, single-purpose entities. Accordingly, the provider and the host should determine in the LOI if they are going to provide parental guaranties to each other and under what terms.

Conclusion

While the list of issues this article covers is by no means exhaustive, the author hopes that it will be helpful in streamlining the negotiation of PPAs.

This article appeared in the March 2014 issue of The Metropolitan Corporate Counsel. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of Sills Cummis & Gross P.C. Copyright © 2014 Sills Cummis & Gross P.C. All rights reserved.

Article by:

Kevin J. Moore

Of:

Sills Cummis & Gross P.C.

2nd Conflict Minerals Reporting and Supply Chain Transparency – June 23-25, Chicago, IL

The National Law Review is pleased to bring you information about the 2nd Conflict Minerals Reporting and Supply Chain Transparency Conference, June 24-25, 2014, presented by Marcus Evans.Conflict-Minerals-250-x-250

Click here to register.

Where

Chicago, IL

When

June 24-25, 2014

What

The 2nd Sustaining Conflict Minerals Compliance Conference will break down each SEC filing requirement as well as examine direct filing examples from specific companies. Discussions will tackle key issues including refining conflict minerals teams to create a more successful conflict minerals management program, managing and developing consistent communication within the supply chain, and building an IT program that will continue to secure data from the various levels of the supply chain.

This conference will allow organizations to benchmark their conflict minerals management program against their peers to more efficiently meet SEC expectations and amend their program for future filings. Seating is limited to maintain and intimate educational environment that will cultivate the knowledge and experience of all participants.

Key Topics
  • Scrutinize the Securities and Exchange Commission (SEC) requirements and evaluate external resources for a more efficient conflict minerals rule with Newport News Shipbuilding, Huntington Ingalls Industries
  • Engineer a sustainable conflict minerals program for future filings with Alcatel-Lucent
  • Integrate filings and best practices from the first year of reporting with BlackBerry
  • Maintain a strong rapport with all tiers of your supply chain to increase transparency with KEMET
  • Obtain complete responses moving throughout the supply chain with Global Advanced Metals

Register today!

Caveat Emptor: Due Diligence of the United Kingdom Continental Shelf Oil and Gas Assets

Andrews Kurth

 

This article explores the due diligence of United Kingdom continental shelf (“UKCS”) oil and gas assets from a buyer’s perspective. Good management, organisation, communication, clarity and common sense are the key to a successful due diligence exercise. The scope of the due diligence review will depend on a number of factors, including whether the buyer has any knowledge of or a current participating interest in the target asset, whether the asset is in the exploration or production phase or is an operated asset, the size of the deal and any cost and time restraints. Whether a buyer requires a red flag due diligence report or a comprehensive report on the asset, care must be taken to ensure that no stone is left unturned during the course of the review. Failure to do so may result in undesirable consequences.

Preparation

Before embarking on an extensive review of the documentation provided by the seller, the buyer should seek to determine the scope of the due diligence exercise at the outset to prevent it from becoming a moving target which may lead to inefficiencies and unexpected cost implications. Sometimes the prospective buyer will investigate the asset with a view to purchase. More often than not, due diligence of the asset will amount to no more than a tyre-kicking exercise. The intention of the prospective buyer will therefore ultimately colour the scope of the due diligence undertaken.

As well as considering the information memorandum prepared by the seller (if any), it is also useful for the buyer to geographically place the asset by consulting a map of theUKCS licence interests and blocks. Such preparations will enable the buyer to better piece together the documentation provided in respect of the target asset and request any missing information from the seller.

Data Room

Whether the seller furnishes the buyer with a virtual or a physical data room, the buyer must keep an accurate record of the documents that have been disclosed. If a virtual data room is employed, the buyer must ensure that it is notified when new documents have been provided and, if documents are supplied in soft or hard copy outside of the virtual data room arrangement, details should be kept of these by the buyer as well. This is all essential because all disclosure will later form part of the sale and purchase arrangements between the buyer and seller.

Data rooms for asset disposals typically include legal, financial, technical, commercial and operational documents. One of the first tasks that a buyer should undertake is to review the data room index, if one has been provided, and allocate documents to the various specialists for review; careful coordination is paramount to ensure that all bases are covered. If no index has been supplied, one should be requested from the seller and, if such index is not forthcoming, it is recommended that the buyer compiles an index so that it can keep a running record.

Depending on the scale of the exercise and number of people employed to assist, the coordinator of the due diligence exercise should ensure that team members effectively communicate with each other. Typically, virtual data rooms limit access rights to a small pool of permitted entrants, so responsibilities should be allocated between professionals at an early stage. Data rooms are often poorly organised so it is important that the coordinator is made aware of documents which have been filed out of place in order for them to be allocated to the correct team members for review. This way, no document will be overlooked.

Title Verification

A UKCS asset is typically represented by a licence, a joint study and bidding agreement (“JSBA”) or joint operating agreement (“JOA”) and, in some cases, a working interest assignment. Assets may also be subject to a unitisation and unit operating agreement (“UUOA”), transportation, processing and petroleum sales agreements and other material project contracts.

One of the key objectives of the buyer’s due diligence is to determine whether the seller actually holds an interest in the asset. Often an asset will be described inconsistently in the documentation by which it is governed and may not correspond accurately with the information held by the Department of Energy and Climate Change (“DECC”). This is especially true of those assets historically operated under a JOA which has been subsequently sub-divided to apply to multiple blocks within a licence, or those assets with an alias which has stuck over the passage of time. It is therefore very important that both parties are agreed on the correct identity of the asset being bought and sold from the outset.

Similarly, infrastructure assets are frequently referred to under a variety of guises and are often complex in nature. For instance, the Sullom Voe Terminal, which is one of the largest oil terminals in Europe, handles production from more than twelve oil fields in the east Shetland Basin and approximately twenty different companies presently hold interests in the terminal. This, combined with the fact that it has been 35 years since first oil arrived at the Sullom Voe Terminal, means that tracing title to this infrastructure asset is likely to be a knotty and time-consuming exercise.

Although DECC holds data on all offshore licences, this should by no means act as a substitute for mechanically tracing title to an asset, however tempting this may be. Many UKCS assets date back over 40 years and so tracing title back to their inception can be a lengthy process. The buyer must therefore decide whether it wants to undertake or commission such work, or whether it can take comfort from tracing title back through only a limited number of transfers and seek a full title guarantee from the seller. Extensive title representations and warranties may reduce the scope of title due diligence but often they will be qualified by the information, or lack thereof, disclosed to the buyer in the data room and so are not a reliable remedy if there is a title defect.

There may be some merit in tracing title of each material contract back to the date on which it became effective in order to determine whether or not it is relevant to the transaction. Sometimes contracts in the data room will have been entered into by parties which are neither the seller nor its predecessors in title and, in other cases, may not be relevant to the target asset at all. In these circumstances, and depending on the purchaser’s view of the asset, it may be more efficient to determine which contracts are required to be assigned or novated at the due diligence stage rather than when the parties are seeking to complete the deal.

An additional complication is that a company which was originally the holder of an interest in an asset may have changed its name since it was first registered at Companies House. The buyer should therefore consult the change of name register held by Companies House at the start of the due diligence exercise and take note of any previous names. This will enable the buyer to piece together information relating to the asset more easily.

Title to assets, excluding infrastructure, is evidenced by the relevant licence, JSBA or JOA and, if applicable, UUOA. Typically, a transfer of a participating interest will be evidenced by a JSBA or JOA deed of novation, and if applicable a UUOA deed of novation, which will provide for the transfer of the relevant participating interest from the seller to the buyer. Conversely, not every transfer of a participating interest will be evidenced by a licence assignment. An example of this is where the buyer and seller are already party to the JOA and/or UUOA. If neither the buyer nor the seller is joining or leaving the licence, and the parties are simply adjusting their participating interests under the JOA and/or UUOA, a licence assignment will not be required. In the same way, where a licence governs multiple blocks and the buyer has an interest in another block covered by the licence and the seller is also remaining on the licence, either because it has an interest in another block covered by the licence or because it is only selling part of its interest to the buyer in the relevant block, when the buyer acquires the interest in the relevant block, a licence assignment will not be required.

There is often a question asked as to whether working interest assignments are required to show a complete chain of title to an asset. A working interest assignment evidences the transfer of the beneficial interest in the asset. The more prevalent view is that this type of assignment is no longer necessary to perfect title, especially where there is a JSBA, JOA or UUOA already in place. Its purpose, being a document on which stamp duty was levied, is now obsolete. Although, buyers and sellers still frequently include the working interest assignment in their suite of completion documents by means of convention, it is not obligatory to enter into this assignment to complete an asset transfer. Due to the disproportionate amount of time and energy that buyers and sellers may spend in hunting for non-existent working interest assignments to evidence a complete chain of title, the better view may be to exclude the working interest assignment from the scope of the title due diligence exercise.

Assignment

Pre-emption rights and consent provisions are principal deal-structure considerations and should therefore be given top priority when conducting the due diligence exercise. Their consequences may prevent the proposed deal from going ahead, increase the cost of the transaction if co-venturers are permitted to withhold their consent on the grounds of financial incapability unless some form of financial security is provided by the buyer and/or cause the deal to be restructured as a share sale. It will therefore be important to review the assignment provisions of all the material contracts, and particularly any JSBAs, JOAs and UUOAs, to identify such obstacles at the earliest possible stage.

If an asset is governed by both a JOA and UUOA, care needs to be taken in order to determine whether the pre-emption and/or consent provisions in one or both agreements apply. Often the UUOA will expressly state that the provisions in the UUOA supersede the provisions in the JOA to the extent that they conflict. In this case, the assignment provisions in the UUOA will override the assignment provisions in the JOA in respect of the area covered by the JOA which forms part of the unit area. Any remaining area that is solely governed by the JOA will be subject to the JOA pre-emption and consent provisions. If it is not clear from the documentation whether the provisions in the UUOA or JOA will prevail, the better approach for a buyer to take may be to err on the side of caution; in other words, to apply the more onerous pre-emption and/or consent provisions to the whole of the asset transfer or consider restructuring the transaction as a share sale.

Material Contracts

The scope of the due diligence review of material contracts is likely to be determined by the materiality threshold proposed by the buyer with respect to contract value. The buyer should review all material contracts in order to ascertain whether the seller has the necessary rights under such contracts and identify potential liabilities, risks and onerous provisions that affect the valuation of the asset or, worse still, could prevent the deal.

It is important that the correct selling entity holds an interest in the relevant material contract and any inconsistencies should be highlighted to the buyer so that the seller can arrange for any necessary inter-group transfers in good time if required. The buyer should also be vigilant to any poison pills that kill the contracts in the event of a change of party or change of control.

If time, cost and scope permit, it can be invaluable to prepare full and accurate contract summaries of all material contracts. The simplest and most efficient way of doing this is to table contract summary templates for the various categories of contract. For instance, there could be separate templates for licences; JSBAs, JOAs and UUOAs; petroleum sales agreements; transportation and processing arrangements; and sundry agreements, if applicable. Templates are useful aides to those reviewing the asset documentation. Firstly, they ensure that all members of the team focus and report on every provision of the contract within the scope of the due diligence exercise. Secondly, and especially for large scale due diligence reviews, they are important for the purposes of consistency and efficiency. The buyer’s due diligence report should be informative, concise, on point and appear to have been written by one person. Full, tailored contract summaries help to achieve this purpose.

Contract summaries also serve a bigger purpose. If after the due diligence exercise the buyer decides to enter into a sale and purchase agreement with the seller and proceed to completion, the closing documents will include deeds of assignment and novation for the various material contracts. Complete contract summaries make the task of deducing which material contracts will need to be assigned or novated easier. They also make for a more efficient process as they prevent the buyer from having to re-locate each document in the data room and re-review their provisions.

If the asset is producing or has an approved field development plan, the buyer should expect to see material contracts in the data room relating to petroleum sales agreements and lifting, transportation and processing arrangements. Particularly in respect of some of the older UKCS assets, it is not always clear whether a document is historical or not. Typically, the buyer will exclude historical construction, tie-in commissioning and joint development agreements from its due diligence scope and place less emphasis on reviewing pipeline crossing and proximity agreements, unless it has a particular interest in the provisions of such documents.

It is likely that the data room will include some material contracts which are governed by the laws of another country or state. Depending on the importance of such contracts, the buyer should consider whether to seek advice from local counsel. In addition, in the course of due diligence for an asset acquisition, it is likely that there will be property and tax related documentation and these should be reviewed by specialists in those fields. It may also be necessary to examine the proposed transaction from a competition perspective and so the need for competition lawyers should be considered at an early stage.

During the due diligence exercise, the buyer should be aware of any information which evidences that the seller has been acting in breach of contract or is in breach of its licence obligations. Any current or anticipated claims from third parties or on-going litigation will be of particular interest to the buyer and should be noted. The buyer should also be alerted to whether any contractual provisions will be breached by the acquisition of the target asset if they are ignored by the buyer. For instance, often under seismic data contracts data must be returned or a supplemental fee paid if the identity of the purchasing company alters.

On completion of a transaction, the buyer will want all material contracts to be novated to it from the seller, unless the transaction is structured as a share sale. In some circumstances this may not be possible if third-party consents remain outstanding and so the seller and buyer should use their reasonable endeavours to obtain such consents post completion. Typically, this approach is only taken in respect of those contracts of limited value or importance. The seller will agree to hold such contracts as trustee and agent of the buyer and the buyer will agree to perform such contracts on the seller’s behalf and indemnify the seller against any costs or liabilities it incurs in respect of such arrangement. This split completion approach is not always possible in respect of those agreements which are contractually linked to others or to the transfer of the participating interest. The buyer should therefore bear in mind any linkage provisions that it uncovers in its due diligence exercise.

Decommissioning

The buyer will be keen to discover whether a field-wide decommissioning security agreement is in place for the target asset or whether the JSBA, JOA and/or UUOA include decommissioning security provisions. Where decommissioning security provisions exist, the buyer should consider the type and amount of security required, the credit rating of such security, whether the asset is in the run-down period and/or how the trigger date is calculated. Depending on the terms of the transaction and whether a section 29 notice has been served on the seller before the asset is transferred to the buyer, the buyer may need to provide security for decommissioning under the sale and purchase agreement to the seller as well. Decommissioning arrangements will be a fundamental consideration to the buyer’s valuation of the asset and will therefore always require financial and/or actuarial input.

Encumbrances

The buyer should conduct a charges search at Companies House in order to determine whether the seller should arrange for any outstanding encumbrances over the asset to be released as part of the transaction. The buyer should also be concerned with any third-party royalties over the seller’s interest in the asset. Any royalty payments on production in respect of all petroleum won and saved will have an impact on the financial value of the target asset and so the buyer should factor the existence of these into its valuation.

Likewise, details of any outstanding cash calls, sole risk activity or carried interests may also be important considerations for the buyer and their existence may result in an adjustment of the price the buyer is prepared to pay for the asset.

Questions and Answers

The question and answer process is central to the due diligence exercise and is an important string to the buyer’s bow. By asking the seller questions, the buyer can better understand the seller’s asset from the responses provided and seek to address any holes or limitations in the data room documents. A classic example of the curious incident of the dog that didn’t bark in the night is the unknown existence of an area of mutual interest agreement which, in the most draconian of circumstances, may prevent a buyer from completing its transaction with the seller, or may prevent the buyer from applying for and/or acquiring an interest in another particular licence area post completion of its transaction with the seller.

If draft contracts have been included in the data room the buyer should ask the seller to confirm whether final versions have been executed and, where documents which have been provided during the due diligence exercise refer to others which have not, the buyer should request these missing documents from the seller. The buyer should maintain an accurate list of questions that have been submitted to the seller and the responses received. Sometimes questions will be answered unsatisfactorily and it is therefore important for the buyer to re-phrase or pursue answers to the originals.

The buyer may also choose to contact DECC with questions on an unnamed basis during the due diligence exercise if there appears to be an inconsistency between the asset data held by DECC and the documentation provided by the seller in the data room. In doing so, the buyer must be careful not to breach any provisions contained in any confidentiality or non-disclosure agreement that has been entered into between the buyer and seller in respect of the transaction.

Conclusion

The buyer conducts due diligence so that it can properly evaluate the risks and benefits to it in acquiring a particular asset, re-negotiate the price that it is prepared to pay for the asset, and decide whether or not to go ahead with the purchase. The due diligence report should identify and quantify issues found and propose solutions for the buyer to consider. Depending on the concerns identified, traditional contractual protections in the sale and purchase agreement may be insufficient and, consequently, the buyer may decide to walk away from the deal. The importance of the due diligence exercise is therefore paramount.

Article by:

Rebecca Downes

Of:

Andrews Kurth LLP

Illinois Environmental Protection Agency (IEPA) Proposes Emergency Petcoke Rules to the Illinois Pollution Control Board

SchiffHardin-logo_4c_LLP_www

On Thursday, January 16, 2013, the Illinois Environmental Protection Agency (IEPA)filed a proposal and motion for emergency rulemaking regarding the containment of coke (also referred to as petroleum coke, or petcoke) and coal at bulk terminals with the Illinois Pollution Control Board (Board).  In the proposed rule, IEPA asserts that fugitive emissions emanating from several outdoor storage areas at bulk terminals in Cook County are not properly controlled and, therefore, constitute a threat to the public interest, safety, or welfare.  The rule requires sources to engage in a number of management activities, take immediate measures to suppress fugitive emissions, and totally enclose all coke and coal piles. [1]

The rule applies to coke and coal bulk terminals which are defined as sources, sites, or facilities that store, handle, blend, process, transport, or otherwise manage coke or coal.  A number of these bulk terminals are located along shipping channels and waterways such as the Calumet River, Illinois River, and the I&M Canal.  Excluded from the rule are sources, sites, or facilities that “produce” or “consume” the coke or coal, such as mines or coal-fired power plant sites.  We highlight a few key requirements and deadlines included in the proposal below, but this is not an exhaustive list.  To see the entire proposal, please click here.

  • Within 60 days, all coke and coal that has been at the source for more than a year must be moved to a location that complies with the requirements of the Act and Board regulations.
  • All other coke and coal must be used or removed within a year from the date it was received.
  • Within 45 days, sources must submit a plan to IEPA for the total enclosure of all coke and coal within two years.
  • Within 45 days, sources must submit to IEPA and follow a Coke and Coal Fugitive Dust Plan.
  • All plans submitted pursuant to the proposed rules will be posted on IEPA’s website and subject to a 30-day public comment period.
  • Beginning 60 days after the effective date, new setback requirements apply in Cook County, municipalities, and their immediate surroundings requiring coke and coal piles that are not totally enclosed to be located at least 200 feet inside the property line of the source.
  • Beginning 60 days after the effective date, all coke and coal piles must be on impermeable pads and located at least 200 feet from waters of the U.S., public water supply reservoirs and intakes, and any potable water well.
  • No loading or unloading or otherwise “disturbing” coke and coal piles when wind speeds exceed 25 miles per hour.
  • Sources must discontinue the use of non-paved roads within 90 days

Owners or operators of sources subject to the emergency rules will have to implement a number of other operational measures to comply with the rules.  In addition, the rule proposes rigorous recordkeeping and reporting requirements that impose, at minimum, monthly certification and reporting requirements.

The Illinois economy relies on shipping canals and water systems on a daily basis as transportation corridors so we are further reviewing this proposal to ensure the end result does not impede commerce.  The proposal raises several questions such as whether it is economically reasonable or even technically feasible to totally enclose all of these areas in the manner prescribed in the rules especially given the short timeframes for compliance.  This rule could also be reaching unintended entities.  Finally, we are reviewing whether IEPA has adequately supported that an emergency exists.  The Agency’s proposal as filed does not provide clear answers to these questions and we intend to work closely with the IEPA to help identify areas where the regulatory approach may be improved.  The Board will address IEPA’s motion at the January 23, 2014 Board meeting, but the Board can take a number of actions and the outcome is unknown.  Nonetheless, the rulemaking docket is now open to accept public comments through noon on Tuesday, January 21.  This is the time to begin educating the State and others as to the importance of the coke and coal industry to the State and nation, and to ensure that the difficulties presented by the rule are known.  Since emergency rules, once effective, have a limited effective period, the next step for the State will be to develop a more permanent framework for regulation, either through a full rulemaking or legislation.  Industry must be mindful of the need to participate fully in order to ensure any framework developed is achievable and sensible.

[1] Generally, “coke” is derived from the distillation of coal, including metallurgical coke, or “metcoke” or from oil refinery coker units or other cracking processes, including petroleum coke, or “petcoke.”  Coke is primarily used as a fuel.

Article by:

Amy Antoniolli

Of:

Schiff Hardin LLP

Wisconsin Supreme Court Upholds Broad Asbestos Exclusion

vonBriesen

 

In Phillips v. Parmelee, 2013 WI 105 (Dec. 27, 2013), the Wisconsin Supreme Court upheld the validity of a broad asbestos exclusion.

In 2006, Daniel Parmelee and Aquila Group (“Sellers”) sold an apartment building to Michael Phillips, Perry Petta and Walkers Point Marble Arcade, Inc. (“Buyers”) covered by an American Family business owners policy. Prior to selling the building to Buyers, Sellers received a property inspection report noting the probable presence of asbestos. However, Buyers claimed Sellers never put them on notice that the property probably contained asbestos and eventually filed suit.

The trial court granted American Family’s motion for declaratory judgment due to the policy’s broadly worded asbestos exclusion. The court of appeals upheld the trial court’s decision.

The asbestos exclusion at issue stated as follows:

This language does not apply to … “property damage” … with respect to:

a. Any loss arising out of, resulting from, caused by, or contributed to in whole or in part by asbestos, exposure to asbestos, or the use of asbestos. “Property damage” also includes any claim for reduction in value of real estate or personal property due to its contamination with asbestos in any form at any time.

b. Any loss, cost, or expense arising out of or in any way related to any request, demand, order, or statutory or regulatory requirement that any insured or others identify, sample, test for, detect, monitor, clean up, remove, contain, treat, detoxify, neutralize, abate, dispose of, mitigate, destroy, or any way respond to or assess the presence of, or the effects of, asbestos.

….

f. Any supervision, instructions, recommendations, warnings or advice given or which should have been given in connection with any of the paragraphs above.

The only issue presented to the Wisconsin Supreme Court was whether the asbestos exclusion in the American Family policy precluded coverage for the losses claimed by Buyers.

First, Buyers argued the term “asbestos” is ambiguous because it is undefined in the American Family policy and there are various forms and meanings of “asbestos.” The court was unpersuaded and found a reasonable person reading the policy would understand the word “asbestos” to mean any form of asbestos.

Buyers then argued the broad language of the asbestos exclusion invites multiple reasonable interpretations and it should be narrowly construed against American Family. The court found the case law cited by Buyers in support of their position to be factually distinguishable because the exclusion language in that policy was materially different from the broad, comprehensive language in the American Family policy, which included a wider range of asbestos-related losses than the case law cited by Buyers.

Finally, Buyers asserted that the Sellers negligently failed to disclose defective conditions or any other toxic or hazardous substances contained on the property. However, the court found nothing in the record to demonstrate the Buyers sustained any loss related to electrical or plumbing issues. Rather, the loss arose from asbestos.

For the aforementioned reasons, the Wisconsin Supreme Court upheld the court of appeals’ decision giving force to American Family’s broadly worded asbestos exclusion.

Article by:

Of:

von Briesen & Roper, S.C.

Reform Opens Door to Private Investment in Mexico’s Energy Sector

Morgan Lewis logo

Mexican Senate presents comprehensive Energy Reform Bill to the House of Representatives with tremendous potential for domestic and foreign energy companies.

In an encouraging move toward energy reform, the Mexican Senate approved today and presented to the House of Representatives a bill—the combined effort of Partido Acción Nacional (PAN) and Partido Revolucionario Institucional (PRI)—with a constitutional reform proposal (the Energy Reform Bill) that paves the way to allow production and profit-sharing arrangements with, and the issuance of risk-sharing licenses to, private parties. The bill further advances the efforts of both parties, detailed in our August 15, 2013 LawFlash,[1] to promote energy reform in Mexico.

If the bill is enacted, these production and profit-sharing arrangements could be entered either directly by private parties or in association withPetróleos Mexicanos (Pemex), the state oil company. It is expected that risk-sharing licenses will mimic a concession-based system that would allow the booking of reserves for accounting purposes. Mexico has struggled with the adoption of a “pure” concession-based system due to a deeply engrained social and political belief that Mexico’s oil and gas reserves are and should remain the exclusive property of the Mexican state.

In addition, the Energy Reform Bill proposes the creation of the Mexican Oil Fund, with Mexico’s central bank, Banco de México, acting as the trustee. The fund would manage, invest, and distribute hydrocarbon revenues.

In the power sector, the Energy Reform Bill reaffirms the state monopoly with respect to the operation of the national grid and transmission and distribution activities. However, if enacted, the bill would break horizontal processes by permitting private parties to participate and contract with the Comisión Nacional de Electricidad (CFE), the state-owned utility company, and by allowing competitive activities with respect to power generation and commercialization.

Details on the reform are expected to be addressed in subsequent legislation that would follow congressional approval of the Energy Reform Bill; however, the bill underlines the reality of the reform and its potential for domestic and foreign private investors. The Energy Reform Bill, if approved, would give Congress a 120-day period to establish the necessary legal framework and regulate the new contracting mechanisms.

In order to pass, the bill will have to be approved by the House of Representatives and by 17 of the 32 state legislatures. It will then be submitted back to Congress for presentment of the final bill to the president, who must sanction and sign the proposed Energy Reform Bill into law, at which point it will be published in the Mexican Federal Official Gazette. Although some adjustments are expected, both PRI and PAN have indicated their intent to complete the congressional approval of the constitutional amendments on or before December 15, 2013.

[1]. View our August 15, 2013 LawFlash, “Mexican Government to Consider Overhaul of Energy Sector,” available here.

Article by:

Of:

Morgan, Lewis & Bockius LLP