1 Brownfields 2004 St. Louis, MO Environmental Liability Disclosure Brownfields 2004 St. Louis, MO Environmental Liability Disclosure Presented by Michael Testone MGP Environmental Partners LLC September 22, 2004

2 Widespread Environmental Liability Reporting Deficiencies Price Waterhouse LLP Report on Environmental Liability Disclosure (1992) GAO Report on Insurance Industry Disclosure Problems (1993) Tellus Institute Survey of Financial Analysis by U.S. Manufacturing Firms (1995) U.S. EPA Study of Environmental Compliance Reporting (1998) SEC Survey of Fortune 500 Companies (2002)

3 Consequences of Environmental Nondisclosures Solutia, Inc. (Monsanto spin-off) – 60% drop in stock value and multiple lawsuits for dumping hazardous pollutant and covering up behavior U.S. Liquids, Inc. – 58% drop in stock value and shareholder suit for illegally dumping hazardous waste and falsifying records Lee Pharmaceuticals, Inc. – SEC enforcement proceeding and sanctions for not reporting Superfund liability Viacom, Inc. – SEC complaint filed by public interest organizations for not reporting Superfund liability

4 Primary Reasons for Reporting Deficiencies Primary Reasons for Reporting Deficiencies Current auditing practices tolerate nondisclosure – “Don’t Ask, Don’t Tell” (GAAS) “Material” environmental liabilities must be disclosed, but aggregation of liabilities is not required by GAAP Liabilities must be accrued only if potential loss is “probable” and can be “reasonably estimated” (FASB, SFAS No. 5) The minimum loss estimate in a range can be used if no amount within a range is a better estimate than any other amount within the range (SAB No. 92)

5 Impact of Sarbanes-Oxley SOX requires : Audit of methodology used to gather information Implementation and maintenance of disclosure controls and procedures (Section 404) Oversight by Audit Committee Sections 302 and 906 Certifications by CEO and CFO

6 Impact of SOX (cont.) In addition to GAAP requirements, the “Fair Presentation” test under Section 302 requires: “…the inclusion of any additional disclosure necessary to provide investors with a materially accurate and complete picture of an issuer’s financial condition, results of operations and cash flows.” “…the inclusion of any additional disclosure necessary to provide investors with a materially accurate and complete picture of an issuer’s financial condition, results of operations and cash flows.” PCAOB (not FASB) Now Controls Accounting Standards

7 Notable Accounting Rule Changes FAS 143 – Accounting for Asset Retirement Obligations (Pending Interpretation) FAS 144 – Accounting for the Impairment or Disposal of Long-Lived Assets

8 Key Solutions Materiality should be defined as an aggregate concept (ASTM E 2173) Standardize cost estimation process for environmental disclosure – “Expected Value” approach (ASTM E 2137) Tightening of Auditing Standards in response to Rule 404

9 Benefits of Accurate Environmental Liability Disclosures Accuracy of Investor Information Avoidance of Adverse Publicity Levels Competitive “Playing Field” Potential for Increased Sale and Redevelopment of Contaminated Property

10 Real Estate Impact & Opportunities Increase in Proactive Assessment and Cleanup of Contaminated Properties Increased Availability of Environmental Information for Decision-Making Increase in Sale of Impaired Properties Increased Implementation of Long-Term Operation & Maintenance Plans