Financial Assurance Assessment and Determination

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Cornelius McBride
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1 Department of Environment & Climate Change NSW Financial Assurance Assessment and Determination Presentation to Extraordinary Meeting of the Orica Botany Groundwater Community Liaison Committee 6 August 2007 Joe Woodward Executive Director Operations 1 Outline Contamination at Botany and legislative tools Basis for Financial Assurance DECC s assessment and review of report by Ernst and Young Financial Assurance conditions 2 1

2 Groundwater Contamination at Botany Initial efforts focussed on assessments of extent, technologies and risks Voluntary process under Contaminated Land Management Act applied until Contaminated Land Management (CLM) Act Protection of the Environment Operations (POEO) Act Declaration Order issued on Orica Botany Groundwater Plume Declaration only removed when DECC satisfied contamination is addressed Notice of Clean Up Action issued under POEO Act (September 2003) 4 2

3 Key regulatory tools used by the DECC Notice of Clean-Up Action required Groundwater Treatment Plant (GTP) Joint Determining Authority Report prepared in 2005 Environment Protection Licence also includes requirements for GTP Operations Various regulatory tools available to address contamination issues 5 Basis for Financial Assurance Community submissions to Joint Determining Authority Report Financial Assurance used to ensure long term viability of clean up following GTP construction Financial Assurance secured using POEO Act and can only be used for specific purposes 6 3

4 Objective of Financial Assurance Objective is to secure or guarantee funding for or towards the ongoing operating costs of the Groundwater Treatment Plant and associated groundwater collection infrastructure Required until such time as [DECC] is satisfied the premises are environmentally secure 7 Development of Financial Assurance Orica to: - engage independent and qualified experts; - submit report to DECC by 30 Sep 06, and - lodge Financial Assurance with the DECC Preparation of report by Ernst and Young was an independent process 8 4

5 DECC s Review and Assessment and Determination of Conditions DECC s review and assessment of Ernst and Young report involved DECC Environmental Economics and Legal experts Financial Assurance developed consistent with POEO Act and international principles and practices DECC varied Orica s POEO licence on 31 January 2007 to specify requirements for Financial Assurance 9 Financial Assurance and Orica s Financial Position Credit rating linked to financial position of Orica Limited as follows: - $14.4M for BBB+ or better rating - $35M for BBB rating, and - $72M for rating of less than BBB Orica required to notify changes in credit rating and report information annually 10 5

6 Changes to Financial Assurance DECC can vary Financial Assurance at any time depending upon reassessment of possible cost(s) or [for another] reason to ensure environmental security 3 yearly reviews for inflation and other adjustments Notification requirements for corporate changes that may affect Orica s ability to fund ongoing operation of GTP 11 Summary DECC maintains a strong regulatory approach to ensure contamination at Orica s site is appropriately addressed DECC has a range of powers available to take appropriate regulatory action if issues arise Financial Assurance is an additional mechanism to ensure long-term operation of GTP 12 6

Orica Limited Risk Analysis for the Botany Groundwater Treatment Plant Ernst & Young s Team Glenn Carmody, Partner Partner in Financial Assurance Liza Maimone, Partner Partner and National Head of

7 Orica Limited Risk Analysis for the Botany Groundwater Treatment Plant Ernst & Young s Team Glenn Carmody, Partner Partner in Financial Assurance Liza Maimone, Partner Partner and National Head of Ernst & Young s Environment & Sustainability Services Practice Bachelor of Engineering (Chemical) Environmental Auditor appointed pursuant to the Environment Protection Act 1970 in the State of Victoria Mathew Nelson, Senior Manager Bachelor of Engineering (Mechanical & Manufacturing) Previous role as Operations Engineer at Qenos Chris O Hehir, Director Bachelor Economics (Economics, Statistics and Actuarial Studies) Chris Daniels, Manager Master of Applied Science (Hydrogeology) 2 Ernst & Young Australia Liability limited by a scheme approved under Professional Standards Legislation.

8 Scope of Work Our work was performed in accordance with Australian Auditing Standard AUS 904 Engagements to Perform Agreed-Upon Procedures. The responsibility for determining the adequacy or otherwise of the procedures agreed to be performed by us was that of Orica and the Department of Environment and Climate Change (DECC). 3 Ernst & Young Australia Liability limited by a scheme approved under Professional Standards Legislation. GTP Licence Requirements 1. Review and confirm the estimated annual and total remaining net operating and maintenance costs of the GTP and the associated monitoring and reporting costs over the life of the project. 1.1 Identified inputs into Orica s financial model and determined the costs related to the operation of key equipment in order to meet the minimum groundwater treatment requirements. 1.2 Assessed the net costs included in the financial model against material current operating, maintenance, monitoring and reporting costs for the financial year ending 30 September Assessed potential risks (and opportunities) related to the material operating, maintenance, monitoring and reporting costs of the operation of the key elements of the GTP for 30 years. Findings Summary Based on the procedures performed by Ernst & Young, there were no material changes required to Orica s financial model. 4 Ernst & Young Australia Liability limited by a scheme approved under Professional Standards Legislation.

9 GTP Licence Requirements 2. Review and advise on the risks associated Orica s ability and commitment to meet those costs during the life of the project and the probabilities of those risks. 2.1 Assessed Orica s ability to meet the net costs (including consideration of the financial risks identified in step 2), presented in their financial model and identified indicators of commitment to meet those net costs. Findings Summary Orica s overall credit rating of BBB+ is defined by Standard and Poor s as more than adequate capacity to pay its debts. Overall, based on the procedures performed we did not identify anything to indicate that Orica would not be able to meet the net costs of operating the GTP or that they were not committed to doing so. 5 Ernst & Young Australia Liability limited by a scheme approved under Professional Standards Legislation. GTP Licence Requirements 3. Review and advise on the technical and environmental risks if the licensee is unable to meet the operating costs during the life of the project and the probability of those risks. 3.1 Identified and qualitatively assessed potential technical risks (e.g. personnel understanding of plant processes, operation of the thermal oxidiser) associated with a third party operating the GTP in the event that Orica is unable to meet net costs detailed in Orica s financial model. 3.2 Identified and qualitatively assessed potential environmental risks (e.g. loss of containment) related to the potential shutdown of operations of the GTP or transfer to a third party operator in the event that Orica is unable to meet net costs detailed in Orica s financial model. Findings Summary Orica has a good understanding of the potential risks should they be unable to meet the operating costs and have a good understanding of what will be required to mitigate these risks should they occur. 6 Ernst & Young Australia Liability limited by a scheme approved under Professional Standards Legislation.

10 Public Liability Insurance & Orica s Ability to Meet Possible Claims Orica has a public liability insurance policy in place which provides cover in respect of its legal liability to pay damages for claims by third parties As is customary, insurers do not allow disclosure of the details of policy terms Orica s financial position, good business performance and financial policies provide primary comfort about its ability to meet its obligations 1

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