This chapter describes the use of the corporate guarantee to demonstrate UST FR as follows:
A. BACKGROUND . . . 53 A.1 What Is the UST Corporate Guarantee? . . . 53 A.2 How Does The UST Corporate Guarantee Work? . . . 53 A.3 What Are the Criteria of the Financial Tests for Guarantors? . . . 54 A.4 Why Does the Corporate Guarantee Financial Test Include Hazardous Waste
Obligations? . . . 54 A.5 Who Can Provide A Guarantee? . . . 54 B. OWNER OR OPERATOR RESPONSIBILITIES WHEN USING A CORPORATE
GUARANTEE . . . 56 B.1 Selecting An Eligible Guarantor . . . 56 B.2 Obtaining a Properly Worded Corporate Guarantee and Letter from
Guarantor's Chief Financial Officer for the Proper Scope and Amount
of Coverage . . . 57 B.3 Determining That Guarantor Satisfies the Qualifications of the Financial Test . . . 58 B.4 Finding an Eligible Trustee and Obtaining a Properly Worded Standby
Trust Fund . . . 58 B.5 Recordkeeping . . . 58 B.6 Updating Assurance . . . 59 B.7 Obtaining Alternate Assurance If Guarantor Is No Longer Eligible or
Qualified to Pass the Financial Test, If Guarantor Decides to Cancel the Corporate Guarantee, or If Guarantor Named as a Debtor in
Bankruptcy Proceedings . . . 59 B.8 Reporting Failure to Obtain Alternate Assurance or Being Named a
Debtor in Bankruptcy Proceedings . . . 60 B.9 Submitting Financial Responsibility Documents . . . 60 B.10 Replenishing Assurance After Guarantee Is Used for Corrective
Action and/or Third-Party Compensation . . . 61 C. IMPLEMENTING AGENCY RESPONSIBILITIES AND OVERSIGHT . . . 62
C.1 Responding to Notices That the Owner or Operator Has Failed to Secure Alternate Assurance or Has Been Named as a Debtor in
Bankruptcy Proceedings . . . 62 C.2 Reviewing Financial Responsibility Submissions . . . 64 C.3 Directing Payment to Standby Trust Funds . . . 65 C.4 Monitoring Replenishment of Assurance After Guarantee Is Used for
Corrective Action and/or Third-Party Compensation . . . 66 C.5 Checking Whether the Guarantor and Trustee Are Eligible . . . 67 C.6 Verifying That the Guarantor Can Satisfy the Financial Test for the
Proper Amount of Coverage . . . 70 C.7 Checking the Qualifications of Accountants . . . 73 C.8 Verifying the Wording, Scope, and Amount of Coverage of the Chief
Financial Officer Letter, Guarantee, and Standby Trust Fund . . . 73 C.9 Requesting Reports of the Guarantor's Financial Condition . . . 75 C.10 Notifying Owners or Operators That Their Guarantors No Longer
Meet the Financial Test Requirements . . . 76
D. CORPORATE GUARANTOR RESPONSIBILITIES . . . 77 D.1 Being Eligible to Act as a Guarantor . . . 77 D.2 Demonstrating Satisfaction of Financial Test for the Proper Scope and
Amount of Coverage and Delivering the Chief Financial Officer Letter
and Guarantee to Owner or Operator . . . 77 D.3 Updating Assurance Annually . . . 79 D.4 Notifying the Owner or Operator of Decision to Cancel the Guarantee;
If No Longer Eligible, Qualified, or Authorized to Provide Guarantee;
or If Named as a Debtor in Bankruptcy Proceedings . . . 79 D.5 Funding the Standby Trust as Directed . . . 80 E. SOURCES OF FURTHER INFORMATION . . . 81
A. BACKGROUND
A.1 What Is the UST Corporate Guarantee?
An owner or operator may satisfy the UST FR requirements by using a corporate guarantee. A corporate guarantee is a common option in many government-mandated financial responsibility programs, both environmental and non-environmental (e.g., FR for workers compensation).
A guarantee is a promise by one party (the "guarantor") to pay specified debts or satisfy the specified obligations of another party (the "principal") in the event the principal fails to satisfy the debts or
obligations. An UST guarantee is an agreement in which a guarantor firm promises to pay up to the specified amounts for UST corrective action or third-party compensation on behalf of the owner or operator. A corporate guarantee often will be an inexpensive method of demonstrating FR. Firms that provide a corporate guarantee must both execute a written guarantee and also demonstrate financial strength by passing a set of criteria, termed a financial test. To pass the UST FR financial test, a guarantor must meet one of two alternative tests described in Chapter 3 based on year-end financial statements for the latest completed fiscal year.
A.2 How Does The UST Corporate Guarantee Work?
If the owner or operator fails to perform corrective action or satisfy third-party compensation obligations, the guarantor funds a standby trust fund from which the implementing agency directs the payment of corrective action costs or third-party compensation. A standby trust fund is simply a trust fund that is not yet funded but is otherwise ready to accept monies in the event they are received from a particular source, such as a corporate guarantee. Funds in the standby trust are available to pay the costs of corrective action and third-party compensation. (See Chapter 11 for more information on standby trust funds.)
NOTE: The use of a standby trust is necessary because without such a
mechanism, any funds drawn under the corporate guarantee that are payable to the EPA Regional Administrator would have to be paid into the U.S. Treasury and could not be used without Congressional action (see 31 U.S.C. 3302) to pay for the UST corrective action or third-party compensation for which the funds were intended. Due to similar state laws, funds payable to the state Director may have to be paid into the state treasury, unless a standby trust is used.
This option differs from self-insurance because it involves a source of UST financial responsibility other than the owner or operator.
Within 120 days after the close of each fiscal year, the chief financial officer (CFO) of the guarantor must sign a letter reporting the year-end financial information supporting the firm's use of the financial test. If a guarantor finds that it is no longer eligible or qualified to use a financial test, the owner or operator must obtain an alternate mechanism within 150 days of the end of the guarantor's fiscal year. The Director of the implementing agency may disqualify use of the corporate guarantee upon a finding, based on reports of financial condition, that the guarantor no longer meets the financial test requirements. The owner or operator has 30 days after notification of such a finding to obtain another financial assurance mechanism.
Also, to ensure that state insurance laws do not call into question the validity or enforceability of the guarantee, the mechanism can be used only if it is certified as valid and enforceable by the Attorney General of the state where the USTs covered by the mechanisms are located.
The contractual language specified for the guarantee explicitly limits the guarantor's obligation to the per-occurrence and aggregate amounts for UST corrective action and third-party liability compensation as stated on the face of the instrument. Exclusionary language in the terms of the guarantee clearly limit the type and circumstances of third-party liability compensation for which the guarantee can be used. A guarantor may, however, have incurred obligations outside those of the UST FR guarantee contract, under state law or other contractual agreements with the owner or operator. Such legal obligations (e.g., guarantee of workers compensation FR) are not changed by the limitations in the UST FR guarantee.
A.3 What Are the Criteria of the Financial Tests for Guarantors?
The two alternative financial tests for guarantors are identical to the alternative tests for owners and operators wishing to self-insure. See Sections A.4-A.8 in Chapter 3 for a description of the tests, their components and rationales, auditor's opinions, and acceptable adjustments to the numbers in financial statements. In addition to assuring that the guarantor has an appropriate level of financial strength, the financial test also protects the guarantee from potential bankruptcy challenges.
A.4 Why Does the Corporate Guarantee Financial Test Include Hazardous Waste Obligations?
The corporate guarantee financial test must include any hazardous waste FR amounts covered by the
9
guarantor's RCRA Subtitle C or SDWA financial test of self-insurance or guarantee. Including these RCRA and SDWA hazardous waste costs is necessary to ensure that an UST guarantor can meet all of its
environmental obligations without jeopardizing the financial health of the firm. The financial tests used for hazardous waste facility closure and post-closure care (40 CFR 264.143 and 264.145), liability coverage (40 CFR 264.147), corrective action (40 CFR 264.101),10 and plugging and abandonment (40 CFR 144.63) all
rely on a multiple of a firm's net worth relative to the costs being assured. If these costs are not included in the UST financial test, UST guarantors would, in effect, be "double pledging" their financial resources, thereby reducing the likelihood that UST obligations could be met.
If the guarantor has recognized its hazardous waste closure, post-closure, corrective action, or plugging and abandonment costs as liabilities on its financial statements, some adjustments may be made to the financial data used in the tests. See Section A.8 in Chapter 3 above.
A.5 Who Can Provide A Guarantee?
A guarantee may be provided by certain related firms or by firms that have a "substantial business relationship" with the owner or operator:
9 Underground injection of hazardous wastes is regulated under the federal Safe Drinking Water Act (SDWA). 10 The financial test for hazardous waste corrective action FR was proposed in the Federal Register of October 24,
1986 (pp. 37854-37880), but was never promulgated as a final rule.
The following firms are eligible to provide a guarantee
C Parent firms that own a controlling interest in the owner or operator,
C Grandparent firms that own a controlling interest in the parent firm of the owner or operator C Sister companies that are controlled by a parent that also owns a controlling interest in the owner
or operator.
NOTE: Controlling interest means direct ownership of at least 50 percent of the
voting stock.
C A firm engaged in a "substantial business relationship" with the owner or operator also may provide a guarantee as an act incidental to that business relationship. A substantial business
relationship means the business relationship necessary under applicable state law to make a
guarantee issued incident to the relationship valid and enforceable, rather than an unlicensed entry into the business of insurance. A guarantee is considered incident to such a relationship if it arises from and depends on an ongoing set of economic transactions between the guarantor and the owner or operator or, while a single transaction, is of substantial importance to the owner or operator (e.g., sale of capital equipment or land). A firm engaged in a substantial business
relationship with the owner or operator can be an affiliate (e.g., a subsidiary) that does not meet the definition of parent, grandparent, or sister company.
The reasons for these eligibility requirements are: (1) to ensure that guarantees are valid under appropriate state law; (2) to avoid running afoul of state laws relating to the business of insurance, and (3) to ensure that sufficient unity of interest exists between the guarantor and the owner or operator to provide adequate assurance of financial responsibility. The relationship requirements are those that EPA determined would most likely result in adequate and effective assurance.
Guarantors must demonstrate that they are qualified to provide financial assurance by satisfying either the Alternative I or Alternative II financial test for the required amount of coverage as described in Chapter 3.
Guarantors who pass the test are expected to be able to pay for corrective action and third-party compensation obligations if the owner or operator does not. The test is designed so that those who pass
are very unlikely to experience financial distress that prevents their funding corrective action and third-party compensation. Because the guarantor's financial statements form the basis of the assurance provided, the test must be passed anew with each year's financial statements.
Although guarantors may be spun out of the corporate family, reorganized, or otherwise rendered ineligible or may experience deterioration in their financial strength so that they cannot pass the financial test,
the guarantee itself remains effective until it is cancelled or terminated.
B. OWNER OR OPERATOR RESPONSIBILITIES WHEN USING A CORPORATE GUARANTEE
The following checklist summarizes owner or operator responsibilities.
CHECKLIST OF OWNER OR OPERATOR RESPONSIBILITIES WHEN USING A CORPORATE GUARANTEE
G G G G G G G G G G
Selecting An Eligible Guarantor (see Section B.1)
Obtaining a Properly Worded Corporate Guarantee and Letter from Guarantor's Chief Financial Officer for the Proper Scope and Amount of Coverage (see Section B.2)
Determining That Guarantor Satisfies the Qualifications of the Financial Test (see Section B.3) Finding an Eligible Trustee and Obtaining a Properly Worded Standby Trust Fund (see Section B.4) Recordkeeping (see Section B.4)
Updating Assurance (see Section B.5)
Obtaining Alternate Assurance If Guarantor Is No Longer Eligible or Qualified to Pass the Financial Test, If Guarantor Decides to Cancel the Corporate Guarantee, or If Guarantor Named as a Debtor in Bankruptcy Proceedings (see Section B.6)
Reporting Failure to Obtain Alternate Assurance or Being Named a Debtor in Bankruptcy Proceedings (see Section B.7)
Submitting Financial Responsibility Documents (see Section B.8)
Replenishing Assurance After Guarantee Is Used for Corrective Action and/or Third-Party Compensation (see Section B.9)
B.1 Selecting An Eligible Guarantor
Any owner or operator is eligible to use the corporate guarantee but not all firms are able to provide the guarantee. A guarantor must be both eligible and qualified to provide an UST corporate guarantee to an owner or operator.
Only private companies reporting to credit reporting agencies, publicly-held companies reporting to the SEC, and public utilities reporting to the EIA or RUS are eligible to provide a guarantee. In addition, to be eligible, the guarantor must be a firm that:
C Possesses a controlling interest in the owner or operator -- in other words, the corporate parent; or C Possesses a controlling interest in a firm that has a controlling interest in the owner or operator -
in other words, grandparent firms; or
C Is an affiliate which is controlled through stock ownership by a common parent firm that possesses a controlling interest in the owner or operator -- in other words, sister companies; or, C Is engaged in a substantial business relationship with the owner or operator and is issuing the
guarantee as an act incident to that business relationship.
To be qualified, the guarantor's financial statements and auditor opinions must pass the financial test. Most local government entities and some non-profits will rarely be able to satisfy the criteria of the financial test which must be satisfied in order to provide a corporate guarantee. However, certain public utilities that
file financial statements may be able to pass the test to qualify to provide guarantees. See discussion in Chapter 3. The financial statements used for the test must be those of the guarantor. If the guarantor's financial data are consolidated (i.e., combined) with the owner or operator's financials (see Section B.1 of Chapter 3), the owner or operator is not eligible to use self-insurance but is eligible to demonstrate FR by using the corporate guarantee.
B.2 Obtaining a Properly Worded Corporate Guarantee and Letter from Guarantor's Chief Financial Officer for the Proper Scope and Amount of Coverage
The owner or operator must obtain both a properly worded (1) guarantee and also (2) letter signed by the guarantor's CFO within 120 days of the close of each financial reporting year. The financial reporting year is defined by the twelve-month period for which financial statements used to support the financial test are prepared.
Wording. The required wording for corporate guarantees and CFO letters appears in the federal regulations at 40 CFR 280.96(c). By signing the guarantee and CFO letter, the guarantor certifies that the documents are properly worded.
Scope of Coverage. The corporate guarantee can be used for any scope of coverage (e.g., corrective action, third-party compensation, or both). The guarantee can be used to complement another mechanism that covers only part of the scope (e.g., only corrective action, only third-party compensation) of required coverage. For example, if tanks are located in a state with a fund that covers only corrective action and not third-party compensation (or vice versa), the guarantee can be used to cover the other scope area. The CFO letter and guarantee must cover the full scope of UST FR (see B.2 in Chapter 2 above) unless used in combination with another mechanism that covers the remaining part of the full scope.
To demonstrate compliance with the full scope of UST FR, an owner or operator need not combine a guarantee with an insurance policy that covers only part of the scope (e.g., third-party liability but not on-site corrective action). In such a situation, if the owner or operator can use the guarantee for part of the required scope of coverage, the guarantee also would work for the full scope because the required amount of coverage used in the guarantor's financial test stays the same whether the test is used for all or part of the scope. (Of course, apart from demonstrating compliance, the owner or operator might want to purchase insurance to manage its financial risks.)
Amount of Coverage. A corporate guarantee must be in an amount that is at least equal to the required level of coverage. The exception to this rule is when a corporate guarantee is being combined with another financial mechanism. In the case of a combination of mechanisms, it is the sum of the coverage provided by the mechanisms that must be at least equal to the required coverage level.
NOTE: The corporate guarantee may be combined with a financial test of self-
insurance only if the financial statements of the owner or operator are not consolidated (i.e., combined) with the financial statements of the guarantor. See discussion in Section B.1 of Chapter 3.
B.3 Determining That Guarantor Satisfies the Qualifications of the Financial Test
An owner or operator who intends to use the guarantee for UST FR should do the following:
C Inform the guarantor regarding the scope and amount (i.e., the number of tanks to be assured) of required coverage,
C Verify the guarantor's eligibility and qualifications,
C Remind the guarantor to include in its financial test any other USTs and hazardous waste costs it is covering through a financial test of self-insurance or guarantee, and
C Check that the CFO letter and guarantee are properly worded..
Financial Test Criteria. The Subtitle I financial test of for guarantors consists of two alternative tests. A guarantor need satisfy only one of the two tests. A guarantor must pass the financial test based on the required amount of UST coverage plus hazardous waste FR costs and amounts described in A.4 above. An owner or operator should enter "0" on line 2 if no hazardous waste FR is being assured through self-insurance or by providing a guarantee. Within 120 days after the close of each fiscal year, the chief financial officer of the guarantor must sign a letter reporting the year-end financial information supporting the guarantee.
B.4 Finding an Eligible Trustee and Obtaining a Properly Worded Standby Trust Fund
An owner or operator who uses a corporate guarantee to satisfy UST FR requirements must establish a standby trust fund when the guarantee is acquired. This standby trust fund must meet the requirements specified in § 280.103, and the trustee must be eligible to serve as an UST FR trust fund trustee. Chapter 11 describes what makes a trustee eligible and the required wording for a standby trust fund.
B.5 Recordkeeping
An owner or operator who uses the corporate guarantee for UST FR must maintain on-site or at the place of business a copy of the following documents:
C Guarantor's CFO letter for the most recent completed financial reporting year
C Properly worded guarantee agreement signed by an authorized representative of the guarantor and by the owner or operator
C Signed standby trust fund agreement and copies of any amendments to the agreement, which was established to receive funds from the guarantee. The standby trust fund should satisfy the criteria described in Chapter 11 of this Manual
C Updated copy of certification of FR (described in Chapter 2 Section D.5)
Although not required, an owner or operator using the corporate guarantee may also want to maintain the following information at the same location:
C Information about number of USTs owned or operated for which the UST corporate guarantee is