[PPT] - Workshop 3 Workshop 3 Cost Estimating and Cost Estimating and PowerPoint Presentation

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Workshop 3 Workshop 3

Cost Estimating and Cost Estimating and Financial Assurance Financial Assurance

SWVP-028586

SWVP-0719

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Hal Hong Financial Administrator Technical Support Unit Review Groundwater Section OR Expedited Consultant

Reviews financial mechanism for adequacy and completeness

Project Manager Groundwater Section

Communicates with financial/TSU/applicant Reviews/approves cost estimate detail and adequacy

A.R.S. § 49-243(N) requires a demonstration of financial capability or competence before the Department issues the permit.

SWVP-028587

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Arizona Administrative Code (A.A.C.) Title 18, Chapter 9

http://www.azsos.gov/public_services/Title_18/18_table.htm

Arizona Revised Statutes (A.R.S.) Title 49, Chapter 2, Article 3

http://www.azleg.state.az.us/ArizonaRevisedStatutes.asp?Title=49

Rules & Regulations

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The Beginning…

Individual APPs require closure and post-

closure cost estimates per A.A.C. R18-9- A201(B)(5).

The closure and post-closure plans (R18-9-

A202[A][10])must be signed and sealed by an Arizona-registered P.E. per BTR (§ 32- 125 and R4-30-304).

The costs, based upon the plans, must be

derived by an engineer, controller, or accountant per R18-9-A201(B)(5)(a).

SWVP-028589

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What to include in the plan

Example: WWTPs

Capital costs (new plants only)
One year of O&M costs (new plants only)
Associated labor, equipment, materials
Documentation preparation
Sampling
Remediation, if required
Demolition and disposal
Filling and grading
Mobilization/demobilization of equipment
Report preparation

Note that all calculations for volume, time, etc. should be included in the plan and sealed by an Arizona-registered professional.

SWVP-028590

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What to include in the plan

Example: Impoundment

Design costs (for re-design after closure)
Sampling to determine horizontal and vertical extent of

contamination, if present

Remediation costs
Confirmation sampling
Hauling and Disposal costs
Associated labor, equipment (mob/demob), materials
Backfilling and grading
Report preparation

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Assigning Costs

Industry Standard Costing

Publications/Databases (RSMeans)
Actual vendor quotes (competitive bids)
Operating history for similar facilities
Up-to-date software
Other appropriate sources

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Example Capping

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Example Capping

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Example Excavation/Disposal

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Example Excavation/Disposal

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Example Excavation/Disposal

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Example Excavation/Disposal

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Example Excel Estimate

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Example Excel Estimate

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Financial Mechanisms R18-9-A203

Hal Hong reviews all mechanisms Demonstrate the financial capability to construct, operate, close, and ensure proper post-closure care of the facility in compliance with A.R.S. Title 49, Chapter 2, Article 3, conditions of the individual permit, and A.A.C. Articles 1 and 2 of Title 18, Chapter 9.

SWVP-028601

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What you must do…

1. Submit a letter signed by the CFO stating

the applicant is financially capable of meeting the costs described in R18-9- A201(B)(5). Note: state or federal agency, county, city, town, or other local governmental entity, submit a statement specifying the details

f the financial arrangements used to

meet the costs.

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What you must do…

2. Submit information required for at least
ne of the financial assurance

mechanisms under R18-9-A203(C). Include the following:

The selected mechanism or mechanisms;
The amount covered by each mechanism;
The institution or company that is responsible for

each mechanism; and

Other details that demonstrate how the applicant

is financially capable of meeting the costs described in R18-9-A201(B)(5).

SWVP-028603

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Available Mechanisms

1. Financial test for self-assurance

No consolidation of financial statement with parent or sibling company and include one of the following:

A ratio of total liabilities to net worth less than 2.0

and a ratio of current assets to current liabilities greater than 1.5;

A ratio of total liabilities to net worth less than 2.0

and a ratio of the sum of the net annual income plus depreciation, depletion, and amortization to total liabilities greater than 0.1; or

A ratio of the sum of net annual income plus

depreciation, depletion, and amortization to total liabilities greater than 0.1 and a ratio of current assets to current liabilities greater than 1.5.

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Formula Version of Self-assurance

1. A ratio of total liabilities to net worth less

than 2.0 and a ratio of current assets to current liabilities greater than 1.5; Total Liabilities < 2.0 Net Worth Current Assets > 1.5 Current Liabilities

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Formula Version of Self-assurance

2. A ratio of total liabilities to net worth less than

2.0 and a ratio of the sum of the net annual income plus depreciation, depletion, and amortization to total liabilities greater than 0.1; or

Total Liabilities < 2.0 Net Worth Net Annual Income + Depreciation + Depletion+ Amortization > 0.1 Total Liabilities

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Formula Version of Self-assurance

3. A ratio of the sum of net annual income plus

depreciation, depletion, and amortization to total liabilities greater than 0.1 and a ratio of current assets to current liabilities greater than 1.5.

Net Annual Income + Depreciation + Depletion+ Amortization > 0.1 Total Liabilities Current Assets > 1.5 Current Liabilities

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Self-assurance (continued)

The net working capital and tangible net worth of the applicant each are at least six times the closure cost estimate; and The applicant has assets in the US of at least 90 percent of total assets or six times the cost estimate.

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Self-assurance (continued)

The applicant may demonstrate:

– The applicant’s senior unsecured debt has a current investment-grade rating as issued by Moody’s Investor Service, Inc.; Standard and Poor’s Corporation; or Fitch Ratings; – The tangible net worth of the applicant is at least six times the cost estimate; and – The applicant has assets in the US of at least 90 percent of total assets or six times the cost estimate.

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Self-assurance (continued)

Lastly, the applicant shall submit:

– A letter from the CFO indicating which criterion specified previously is used to satisfy the requirements of the rule, how the applicant meets the criterion, and certification of the letter’s accuracy; and – A statement from an independent certified public accountant verifying that the demonstration submitted is accurate based on a review of the applicant’s financial statements for the latest completed fiscal year or more recent financial data and no adjustment to the financial statement is necessary.

SWVP-028610

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Available Mechanisms

2. Performance Surety Bond
a. Company on bond must be listed as

acceptable surety on federal bonds in Circular 570 of the US Dept. of Treasury;

b. Bond covers entire cost estimate by the surety,
r by payment into a standby trust fund of an

amount equal to the penal amount f the permittee fails to perform the required activities;

c. The penal amount of the bond is at least equal

to the cost estimate, if the bond is the only method used to satisfy the requirements of rule

r a pro-rata amount if used with another

financial assurance mechanism;

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Available Mechanisms

d. Surety bond names ADEQ as beneficiary;
e. Original surety bond is submitted to the

Director;

f. Under the terms of the bond, the surety is

liable on the bond obligation when the permittee fails to perform as guaranteed by the bond; and

g. Surety payments under the terms of the bond

are deposited directly into the Standby Trust Fund.

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Available Mechanisms

3. Certificate of Deposit (COD)
a. Applicant submits one or more CODs made

payable to or assigned to ADEQ to cover the cost estimate or a pro-rata amount, if used with another mechanism;

b. COD is insured by the Federal Deposit

Insurance Corporation and is automatically renewable;

c. The bank assigns the COD to ADEQ;
d. Only ADEQ has access to the COD; and
e. Interest accrues to the permittee during the

period the applicant gives the COD as financial assurance, unless the interest is required to satisfy the cost estimate.

SWVP-028613

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Available Mechanisms

4. Trust Fund
a. ADEQ must be named beneficiary;
b. The trust fund must be initially funded in an

amount at least equal to:

Cost estimate under R18-9-A201(B)(5);
The amount specified in a compliance

schedule approved in the permit; or

A pro-rata amount if used with another

mechanism.

SWVP-028614

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Available Mechanisms

5. Letter of Credit (LOC)

a. LOC is issued by institution regulated and examined by

a federal or state agency;

b. LOC is irrevocable and issued for at least 1 year in the

amount equal to the cost estimate or a pro-rata amount when combined with other mechanism(s). LOC provides automatic 1-year extension, unless a letter indicating cancellation is sent to ADEQ 90 days prior. Permittee must provide an alternate mechanism within 60 days of notice of expiration or cancellation; c. ADEQ is named as beneficiary of the LOC;

d. LOC is prepared by issuing institution and identifies the

issue date, expiration date, dollar sum, ADEQ as beneficiary, and name/address of applicant as the permittee.

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Available Mechanisms

6. Insurance Policy

a. Insurance must be effective prior to permit signature/

issuance;

b. Insurer is authorized to transact business of insurance in

the state and has an AM BEST Rating of at least a B+ or equivalent; c. Permittee must submit a copy of the insurance policy to ADEQ;

d. Insurance policy guarantees that funds are available to

pay cost estimate amount, without a deductible. Policy must guarantee that once cleanup begins that the insurer will pay out funds to ADEQ or other entity designated by ADEQ up to the cost estimate amount;

e. Policy must guarantee continued payment during closure

and post-closure activities that the insurer will pay out funds to ADEQ or other entity designated by ADEQ up to the cost estimate amount;

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Available Mechanisms

6. Insurance Policy

f. Policy must be issued for cost estimate amount or pro- rata amount when other mechanism(s) is used and actual payments by insurer will not change the face amount;

g. Policy must name ADEQ as additional insured;
h. Policy must contain a provision allowing assignment of

the policy to a successor permittee. Transfer of policy is conditional upon consent of the insurer and ADEQ; and i. Policy provides that insurer does not cancel, terminate, or fail to renew the policy except for failure to pay the

premium. Notice of cancellation must be sent 90 days

prior to ADEQ and the permittee has 60 days to provide an alternate financial mechanism.

SWVP-028617

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Available Mechanisms

7. Cash Deposit

The applicant may use a cash deposit if the cash is deposited with ADEQ to cover the cost estimate amount. Account setup with State Treasurer and funds are stored there. It is up to the permittee to maintain funds with the Treasurer and keep documentation. This option may delay permit issuance and/or hold-up a refund at the time of permit release.

SWVP-028618

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Available Mechanisms

8. Guarantees
a. The applicant may use guarantees to cover the financial

assurance obligation under R18-9-A201(B)(5) if the following conditions are met:

i. The applicant submits to the Department an affidavit

certifying that the guarantee arrangement is valid under all applicable federal and state laws. If the applicant is a corporation, the applicant shall include a certified copy of the corporate resolution authorizing the corporation to enter into an agreement to guarantee the permittee's financial assurance obligation;

ii. The applicant submits to the Department

documentation that explains the substantial business relationship between the guarantor and the permittee;

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Available Mechanisms

8. Guarantees
iii. The applicant demonstrates that the guarantor meets

conditions of the financial mechanism listed in subsection (C)(1). For purposes of applying the criteria in subsection (C)(1) to a guarantor, substitute "guarantor" for the term "applicant" as used in subsection (C)(1);

iv. The guarantee is governed by and complies with state

law;

v. The guarantee continues in full force until released by

the Director or replaced by another financial assurance mechanism listed under subsection (C);

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Available Mechanisms

8. Guarantees
vi. The guarantee provides that, if the permittee fails to

perform closure or post-closure care of a facility covered by the guarantee, the guarantor shall perform or pay a third party to perform closure or post-closure care, as required by the permit, or establish a fully funded trust fund as specified under subsection (C)(4) in the name of the owner or operator; vii. The guarantor names the Arizona Department of Environmental Quality as beneficiary of the guarantee.

b. Guarantee reporting. The guarantor shall notify or submit a

report to the Department within 30 days of:

i. An increase in financial responsibility during the fiscal

year that affects the guarantor's ability to meet the financial demonstration;

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Available Mechanisms

8. Guarantees
ii. Receiving an adverse auditor's notice, opinion, or

qualification; or

iii. Receiving a Department notification requesting an

update of the guarantor's financial condition

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Other Requirements in Rule

D. Loss of coverage. If the Director believes that

a permittee will lose financial capability under subsection (C), the permittee shall, within 30 days from the date of receipt of the Director's request, submit evidence that the financial demonstration under subsection (B) is being met or provide an alternative financial assurance mechanism.

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Other Requirements in Rule

E. Financial assurance mechanism substitution.

A permittee may substitute one financial assurance mechanism for another if the substitution is approved by the Director through an amendment under subsection (F).

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Other Requirements in Rule

F. Permit amendment. The permittee shall apply

for an amendment to the individual permit if the permittee changes a financial assurance mechanism or if the permittee's revision of the closure strategy results in an increase in the estimated cost under R18-9-A201(B)(5). If a permittee seeks to amend a permit under R18-9-A211(B), the permittee shall submit a financial capability demonstration for all facilities covered by the amended individual permit with the permit amendment request.

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Other Requirements in Rule

G. Previous financial demonstration. If an

applicant shows that the financial assurance demonstration required under this Section is covered within a financial demonstration already made to a governmental agency and the Department has access to that information, the applicant is not required to resubmit the information. The applicant shall certify that the current financial condition is equal to or better than the condition reflected in the financial demonstration provided to the

ther governmental agency. This provision

does not apply to a demonstration required under subsection (F).

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Other Requirements in Rule

H. Recordkeeping. A permittee shall maintain

the financial capability for the duration of the permit and report as specified in the permit.

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Net Present Value (NPV)

NPV is the amount needed to be set aside at the initial point in time (base year) to assure that funds will be available in the future as they are needed, assuming certain economic conditions.

1. Define the period of analysis.
2. Calculate the cash outflows (payments) for each year of

the project (should be zero for most permits).

3. Select a discount rate to use in the present value

calculation.

4. Calculate the present value.

Reference: A Guide to Developing and Documenting Cost Estimates During the Feasibility Study, EPA 540-R-00-002 OSWER 9355.0-75 www.epa.gov/superfund, July 2000

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Net Present Value (NPV)

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Net Present Value (NPV)

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Net Present Value (NPV)

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Net Present Value (NPV)

Year Year No. Discount Factor Capital O&M Total MNA Periodic Total Cost Total Present Value Cost at 6% 2005 1 0.943396226 135,392 $

$
$
$

135,392 $ 127,728 $ 2006 2 0.88999644

$
$
$
$
$
$

2007 3 0.839619283

$
$
$
$
$
$

2008 4 0.792093663

$
$
$
$
$
$

2009 5 0.747258173

$
$
$

51,521 $ 51,521 $ 38,499 $ 2010 6 0.70496054

$
$
$
$
$
$

2011 7 0.665057114

$
$
$
$
$
$

2012 8 0.627412371

$
$
$
$
$
$

2013 9 0.591898464

$
$
$
$
$
$

2014 10 0.558394777

$
$
$

56,884 $ 56,884 $ 31,764 $ 2015 11 0.526787525

$
$
$
$
$
$

2016 12 0.496969364

$
$
$
$
$
$

2017 13 0.468839022

$
$
$
$
$
$

2018 14 0.442300964

$
$
$
$
$
$

2019 15 0.417265061

$
$
$

62,805 $ 62,805 $ 26,206 $ 2020 16 0.393646284

$
$
$
$
$
$

2021 17 0.371364419

$
$
$
$
$
$

2022 18 0.350343791

$
$
$
$
$
$

2023 19 0.33051301

$
$
$
$
$
$

2024 20 0.311804727

$
$
$

69,340 $ 69,340 $ 21,621 $ 2025 21 0.294155403

$
$
$
$
$
$

2026 22 0.277505097

$
$
$
$
$
$

2027 23 0.261797261

$
$
$
$
$
$

2028 24 0.246978548

$
$
$
$
$
$

2029 25 0.232998631

$
$
$

76,558 $ 76,558 $ 17,838 $ 2030 26 0.219810029

$
$
$
$
$
$

2031 27 0.207367952

$
$
$
$
$
$

2032 28 0.195630143

$
$
$
$
$
$

2033 29 0.184556739

$
$
$
$
$
$

2034 30 0.174110131

$
$
$

84,524 $ 84,524 $ 14,716 $ TOTAL 135,392 $

$
$

401,632 $ 537,024 $ 278,373 $ Yearly Present Value Cost Summary Table SOIL ENCAPSULATION

=1/(1+0.06)^B2 =SUM(D2:G2) =C2*H2 =SUM(D2:D31)

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A discount rate, which is similar to an interest rate, is used to account for the time value of money. A dollar is worth more today than in the future because, if invested in an alternative use today, the dollar could earn a return (i.e., interest). Thus, discounting reflects the productivity of capital. If the capital were not employed in a specific use, it would have productive value in alternative uses. The choice of a discount rate is important because the selected rate directly impacts the present value of a cost estimate. The higher the discount rate, the lower the present value of the cost estimate.

Selecting the Discount Rate (Factor)

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Net Present Value (NPV)

Government agencies and entities typically choose a discount factor of 5 to 7%; however, private entities do Not see this kind of return, so other methods of Determining an appropriate discount factor should be used. For purposes of the ADEQ accepted discount factor, a suggested discount factor would be less than 5% to account for uncertainty and variability of future, unknown conditions. Higher discount factors will require added documentation and supporting material for the development of the discount factor.

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Net Present Value (NPV)

Required to be updated with each significant amendment to the permit or every 5 years, whichever comes first. (Note: RCRA requires an annual update.)

R18-9-A203(F)

The permittee shall apply for an amendment to the individual permit if the permittee changes a financial assurance mechanism or if the permittee's revision of the closure strategy results in an increase in the estimated cost under R18-9- A201(B)(5). If a permittee seeks to amend a permit under R18- 9-A211(B), the permittee shall submit a financial capability demonstration for all facilities covered by the amended individual permit with the permit amendment request.

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Additional References

ADEQ Webpage www.azdeq.gov Water Quality Permitting Webpage http://www.azdeq.gov/environ/water/permits/index.html APP Webpage http://www.azdeq.gov/environ/water/permits/app.html

SWVP-028636