Thursday, December 15, 2016
As published in Financier Worldwide January 2017 | EXPERT BRIEFING | RISK MANAGEMENT on 14 December 2016
The Environmental Protection Agency (EPA) is the statutory body responsible for the licensing of significant activities under environmental law in Ireland. Pursuant to a number of EU environmental directives and national legislation, licensees are responsible for certain environmental liabilities which occur as a consequence of that entity carrying on a licensed activity within the scope of a relevant directive and the Environmental Protection Agency Act 1992 as amended.
The EPA can require that a licensed entity put financial provision in place which it reasonably considers is required to cover the cost of responding to and remedial measures for an incident which occurs as a result of carrying on the licensed activity, and the costs of closure, decommissioning, restoration, aftercare and management of a licensed facility.
This is generally carried out as described below.
The licence will require the licensee to submit a Closure, Restoration and Aftercare Management Plan (CRAMP) and an Environmental Liabilities Risk Assessment (ELRA) including detailed costings to the EPA for approval. The costings and form of financial provision proposed must then be approved by the EPA. The ELRA is required to be reviewed at a minimum every three years and the amount of financial provision reviewed and revised at least annually.
Following the assessment of the environmental liabilities, the licensee must propose a package of financial provision which will be considered and agreed upon by the EPA based on an assessment of whether the financial provision is adequate or not. Financial provision may take the form of one or a combination of security items.
This is a segregated fund subject to security in favour of the EPA. Where the cash fund is not adequate, the EPA may permit a licensee to build up this fund over time subject to additional supporting financial provision, subject to an appropriate funding agreement.
This is a form of guarantee from a reputable entity or institution guaranteeing payment of the licensee’s obligations. Such bonds typically require to be supported by collateral or a credit facility between the institution acting as surety and the licensee.
This is a direct guarantee from the licensee’s parent company of the licensee’s obligations. Similar to an on-demand performance bond, the adequacy of such security will be dependent on the strength, reputation and jurisdiction of incorporation of the parent company.
The EPA will accept security over land or other assets as financial provision subject to a valuation (only 30 percent of the value of a property will be credited as financial provision due to price fluctuations and liquidity issues), no licensed activity being carried on at the property, and the property being unencumbered.
Environmental impairment liability insurance. Appropriate insurance policies may be accepted for unknown liability (other than closure) risks such as pollution events. It is a condition of accepting any such policy that the ELRA be disclosed to the insurer.
Issues for licensees to consider
Assessment process. The ELRA is the key document which the licensee needs to carefully consider, outlining the liabilities that should be covered and how they should be costed. In particular, licensees should consider whether it is necessary for the ELRA to cover actual or potential risks arising from previous activities at the site, including those which are not related to the licensed activity, and the extent to which it should make provision for incidents which are extremely unlikely to arise, or those which could be attributed to the potential actions of a third party.
It can also be helpful to liaise with the EPA and advisers to get a sense of what the EPA generally views as adequate costings for the activity in question, as this can save time and further work at a later stage.
A licensee will need to consider how it proposes to make financial provision for the liabilities and costings identified in the CRAMP and ELRA (as agreed with the EPA), then engage with appropriate advisers to consider its available assets and resources (legal and insurance and banking) to determine what it can deliver as a package of adequate security to the satisfaction of the EPA.
A consideration of the nature of liabilities is necessary to determine the appropriate financial provisions. For example, is there an immediate concern of a real pollution risk or closure event in the lifecycle of the plant or activity? What are the operational and closure risks?
A review of the licensee’s existing finance documents and agreements should be undertaken to consider whether any lender consents are required, or if additional credit facilities or support may be required as a condition of making the financial provision such as a contingent facility necessary for an on-demand bond. What are the terms of any parent or group company’s finance agreements? Is a parent company guarantee required? Is lender consent necessary and how long might this take to obtain?
Consideration whether a funding agreement may be necessary where the licensee is required to build up an environmental liability fund.
Consideration should also be given to the trigger events or termination provisions appropriate to the nature of the risks (i.e., insolvency, failure to comply with obligations or failure to remedy), and also to the environmental liabilities which are to be supported and the circumstances in which the fund may be utilised by the licensee for upkeep and routine remediation works during the security period and term of the licence.
The aftercare security requirements should be considered in terms of closure and decommissioning obligations, and whether these can be satisfied through the lifecycle of the financial provision and the circumstances in which any parent guarantee can be released.
Licensees face a number of considerations outside of operational requirements. It is important that appropriate environmental, operational, financial and legal advice is sought in order to formulate an appropriate package of measures.
Furthermore, licensees must conduct appropriate due diligence and negotiate the optimum environmental plan to meet its licence and regulatory obligations and manage the closure, aftercare and decommissioning risks in an optimum manner from an environmental and financial perspective.