Businesswoman Weighing Decision

To Delay or Not Delay: That Is the (Legacy Liability Management) Question

July 9th, 2020

Virtually every company has legacy environmental liability issues in some shape or form. Certainly, these issues need to be solved, but at what rate? When does it make sense to delay? When do you need to reset and take a more aggressive approach?

Setting aside the correct reserves for potential environmental liabilities is a challenge. If your coffers are bursting at the end of the fiscal year, you might find yourself lamenting lost opportunities to grow your business. On the other hand, if reserves are sparse when there is a need for environmental remediation, this may impact future growth and, perhaps more significantly, your company’s reputation.

Read on to learn about how different approaches to legacy liability management impact cash flow, regulatory relationships, and brand reputation.

Legacy Liability Management Strategies in Action

There are a few strategic approaches for managing acquired environmental liabilities. Each has its own risk-benefit ratio and influences how we approach remediation and building our liability reserves.

Reserve Cash

What it is: Since the focus of this strategy is to minimize cash outlay, companies only spend what is necessary to complete required regulatory monitoring and make required payments toward liability expenses.

Benefits and risks: While payments are minimal, your progress will be slow. And, with accumulating interest, you may find that your aggregate expense is 3-10 times more than the initial upfront cost. This approach also exposes companies to additional risk during the prolonged project duration. Because of the long-term costs and potential impact on company reputation, this approach is limited to cases where cash flow is a concern or environmental liability is uncertain.

Example: Antea Group was engaged by a tool manufacturing company that was using "back of the napkin" approaches (deterministic or single-point estimates) to estimate environmental reserves. Knowing that these estimates were not necessarily defensible, the client sought to create a more formal reserve estimation policy and program.

Antea Group stepped in to build a probabilistic reserve cost modeling tool around the FASB 5 & ASTM framework. The model was designed to be flexible and customizable, meaning that once it was built, the client could input its own variables to perform quarterly reserve estimate updates quickly and easily.

Spend Selectively

How it works: With this approach, often called cash flow optimization, companies time liability spending to leverage favorable regulatory and compliance environments.

Benefits and risks: In theory, this approach generates regulatory goodwill while controlling cash outlay. However, perfecting timing is a challenge, and opportunities are often missed. And with frequent project disruptions, significant expenses are lost to nonproductive start-up and shut-down costs.

Example: Based on the point in the lifecycle of its legacy environmental liability sites, and its current business cycle, a manufacturing company felt it was an opportune time to focus on reducing its legacy environmental portfolio liability, and address associated reserve liability.

Antea Group assumed administration and strategic management of 10 legacy liability sites, tasked with directing the project, developing risk and liability exit strategies, engaging various stakeholders, identifying barriers to closure, recommending risk-based decisions, and conducting regulatory advocacy and negotiations. We also provided technical support on a variety of levels.

Ultimately, the organization's Global Director of Environmental, Health & Safety was able to reduce his time spent managing legacy environmental liability sites by 90% within six months of the project's initiation.

Go All-In on Environmental Remediation

How it works: An aggressive liability reduction strategy involves reducing and eliminating liabilities as quickly as possible, no matter the cost. With this approach, an estimated 80% of the project spend is incurred within the first 36 months.

Benefits and risks: In following this path, favored by regulators, corporations won’t be saddled with enduring costs or the long-term impact to brand reputation. However, expenses can exceed the price of ongoing monitoring. This strategy requires a large liability reserve. So, it’s typically used by larger companies with more extensive resources.

Example: Quick action was needed to address the environmental impact of an underground leak of a 750,000-gallon petroleum storage tank. Antea Group was brought on to reduce spend and regulatory costs related to current efforts and assumed responsibility for systems operations and NPDES permit-required maintenance.

By reacting swiftly and deliberately, the client was able to significantly improve operational reliability, recover 200,000 gallons of free-phase gasoline products, treat 17,000,000 gallons of groundwater, and improve relationships with regulators. And, the benefits are ongoing; by transitioning the project to Antea, the client will save between $400,000 - $800,000 a year.

Finding your Liability Management Strategy

A consistent, measured approach to risks and costs of legacy liability management can provide assurance to your executive leadership team, third-party auditors, and Federal Trade Commission (FTC) compliance requirements.

If you don’t have an in-house team to lead your environmental legacy liability reserve accounting, or could use some guidance to position yourself best for the future, we can help. Contact us to learn how to get ahead with a strategy that reduces long-term risks and increases your remediation reserves.

 

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