Top Ten Environmental Due Diligence Considerations For Acquiring Companies And Assets In The U.S. Energy Sector

A variety of new federal and state environmental and "climate change" regulations and an expected increase in merger and acquisition activity among energy companies make it time to re-visit the essentials of environmental "due diligence."1|

Due diligence is a broad term that refers to the investigations that corporations typically carry out prior to acquiring other corporations, assets or real estate. In complex mergers and acquisitions, corporations are wise to assemble a due diligence team that includes in-house staff, outside counsel, financial experts and environmental consultants. The wide array of federal and state laws that have comprehensively regulated air, water and land pollution since the 1970s make environmental due diligence essential.

For the energy sector, the required due diligence might be beyond the norm because of unique developments in the United States that specifically target the energy sector. For instance, under the Clean Air Act, the U.S. government construes certain upgrades to energy facilities as "major modifications," which triggers the need to install expensive pollution control equipment. Many owners of power plants view changes within a facility as "routine maintenance," which would not require installation of pollution control equipment. The U.S. government has sued some companies over these disagreements and settlements are sometimes valued at hundreds of millions of dollars, with some settlements over a billion dollars. Thus, for the energy sector, a routine review of requisite permits and compliance reports might not be adequate.

Additionally, federal and state governments continue to target the energy sector when developing new regulations. For instance, as part of a permit renewal under the Clean Water Act, states may require replacement of river-water cooling systems with closed-cycle cooling, which dramatically reduces the amount of water used. Closed-cycle cooling can cost hundreds of millions of dollars, however, and could force the closure of plants for which such upgrades do not make economic sense. It is important for a buyer of an energy facility to understand these types of issues in order to best estimate the acquisition's true costs.

What follows are ten basic considerations for carrying out due diligence for the energy sector.

1. Conduct phase 1 environmental site assessments in compliance with ASTM standards.

   The first step in most due diligence projects should be the preparing of a basic environmental assessment to assess conditions at the plant, facility, storage units or other assets to be acquired. Under the primary federal law governing liability for hazardous substances, as well as many of its state counterparts, financial responsibility for hazardous conditions may trail companies for many yearseven after they've sold contaminated property. Additionally, the current owner of contaminated property is liable for hazardous conditions even if it did not cause or contribute to those conditions.2

   The American Society for Testing and Materials, commonly referred to as ASTM, has established widely...