Environmental Evaluations for Energy MAC Program
Background
The Energy MAC Programs, Tiger Peg MAC, Pecten Funding, and Ultimate Finance Corporation, are specialized lending programs that were set up by ExxonMobil, ChevronTexaco, Shell, and BPAmoco (collectively the "brand" sponsors), respectively, to provide low interest rate loans to their branded gasoline distributors to buy stations, build new stations, or refinance existing debt. These programs were created in the early 1990s when owners/operators of gasoline stations found it difficult to get loans because of the environmental stigma often attached to gasoline station operations. Typically, a distributor would offer station(s) as collateral for the loan, which meant the lender was potentially exposed to the cost of a cleanup if the lender should end up owning the property and it was contaminated.
Each MAC program was ultimately created with several layers of defense to ensure that the MACs would always have the dollars to pay back its commercial paper buyers on time if a borrower should ever default. The first layer of defense is the financial evaluation and the environmental evaluation of each loan application performed on behalf of the MAC. In short, the MAC screens applicants in an attempt to lend money to those that appear to be in the strongest position to pay back their loans. The second layer is the requirement that all borrowers must comply with the regulatory requirements to have financial assurance to pay for the cleanup of an underground storage tank (UST) release. The third layer of defense is the ability to sell the property acquired in a default situation for as much as, if not more than, the value of the outstanding loan balance. The fourth layer of defense is a loan loss reserve each MAC has set up to pay for any shortfall between the resale value of a property and the outstanding loan balance. The final layers of defense, which each MAC hopes are used infrequently, if ever, are related to pots of money made available to the MAC by a credit bank (for a fee) and the MAC's brand sponsor (as a guarantee) to pay for any shortfall between the resale value of a property and the outstanding loan balance not covered by the loan loss reserve.
PPC's Role
Although there are many roads that can lead to a borrower defaulting a loan, the possibility that PPC focuses on is that the cost of an environmental cleanup jeopardizes the ability of the borrower to repay the loan. Consequently, the MACs decided to invest in some evaluation of the environmental risks possibly associated with the real property (properties) offered as collateral for a MAC loan. At the time Tiger Peg MAC, Pecten Funding, and Ultimate Finance Corp. were created, the case law and regulations presented a greater risk than is the case today that a lender could become liable for the environmental cleanup of a property it "acquired" through a default situation. Therefore, the MACs wanted to "weed out" those gasoline stations that presented the greatest chance of a possible default triggered by the money drain of an environmental cleanup. The MACs also decided that it was important to evaluate the compliance status of each gasoline station, principally aimed at the features of and management practices associated with the UST systems (tanks and piping). UST system noncompliance could have two possible consequences of concern to the MAC. First, many of the regulations applicable to UST systems speak to the potential for the tanks and/or piping to leak, or to how quickly a leak will be detected should it occur. These questions are directly tied to the threat of an expensive environmental cleanup. Second, it is theoretically possible that an out-of-compliance UST system could be shut down by a regulator, and that could directly affect the income of a station, which, of course, is how a distributor primarily meets his or her financial objectives.
PPC's role with each MAC is to execute its environmental evaluation process for a fixed per-property fee that varies depending upon the number of properties that have to be offered as collateral for a loan. The basic information inputs into the environmental evaluation process are always the same: (1) an environmental questionnaire completed by the applicant; (2) the results of an environmental database search; (3) research conducted to confirm the state's regulatory and financial assurance requirements applicable to USTs; (4) telephone interviews of the loan applicant; and (5) a property appraisal report supplied by the MACs appraisal firm.
The first stage of the evaluation involves assessing whether any of the automatic qualification or disqualification criteria spelled out in the protocols are met. The automatic qualification or disqualification criteria, however, tend to apply to only a small fraction of the collateral properties evaluated. Consequently, the second stage of the filter is applied often. This second stage involves deciding if the estimated reasonable worst case cost to remedy any known or suspected existing contamination equals or exceeds 25 percent of the appraised value of the property after netting out any possible financial assurance contribution. If it does, the property is disqualified. If it does not, the property is qualified, but the loan applicant may receive less than the maximum loan amount of 85% of the property's appraised value as the calculated percentage approaches 25%. This portion of the evaluation relies heavily upon the application of the PPC assessor's professional judgment and experience estimating the costs of petroleum UST site investigations and cleanups.