On Monday, May 2, 2016, the Colorado Supreme Court issued decisions in two cases involving local bans on hydraulic fracturing or fracking in City of Longmont v. Colorado Oil and Gas Association, 2016 CO 29, ___ P.3d ___ (Longmont) and City of Fort Collins v. Colorado Oil and Gas Association, 2016 CO 28, ___ P.3d ___ (Fort Collins). In both cases, the court unanimously held that the bans were pre-empted by the state’s pervasive regulation of this activity. In doing so, the court re-affirmed the validity of its preemption analysis in Bd. of Cty. Comm’rs v. Bowen/Edwards Assocs., Inc., 830 P.2d 1045 (Colo. 1992) and Voss v. Lundvall Bros., Inc., 830 P.2d 1061 (Colo. 1992) with certain clarifications, confirmed that local governments cannot prohibit hydraulic fracturing for any appreciable period of time and suggested that these issues should usually be decided through summary judgment.

An Affirmation of Prior Case Law

The two seminal Colorado cases addressing conflicts between state and local requirements for oil and gas development are the companion cases, Bowen/Edwards and Voss. The Supreme Court’s rulings in Longmont and Fort Collins further cement the legal foundation of the Bowen/Edwards and Voss cases.

In Bowen/Edwards, the Colorado Supreme Court ruled that the Oil and Gas Conservation Act does not preempt all local land use regulation of oil and gas development, but may operationally preempt certain requirements. 830 P.2d at 1056-59. Such operational preemption occurs when a local regulation materially impedes or destroys the state interest. Id. at 1059. The court suggested that this determination should be made after trial-type proceedings, that is, “on an ad-hoc basis under a fully developed evidentiary record.” Id. at 1060. However, the court also suggested that operational conflicts would arise if the local government imposed technical conditions on the drilling or pumping of wells contrary to those required by the state. See id.

In Voss, the court ruled that a total ban on drilling was impermissible because it would conflict with the state’s interest under the Conservation Act in the efficient production and development of oil and gas resources. 830 P.2d at 1066-68. But the court also recognized that local regulation is permissible “if such regulations do not frustrate and can be harmonized with the development and production of oil and gas in a manner consistent with the stated goals” of the Conservation Act. Id. at 1068.

Two subsequent decisions by the Colorado Court of Appeals further define the parameters of preemption in this context, Town of Frederick v. N. Am. Res. Co., 60 P.3d 758 (Colo. Ct. App. 2002) and Bd. of Cty. Comm’rs v. BDS Int., LLC, 159 P.3d 773 (Colo. Ct. App. 2006).

In Town of Frederick, the court ruled that local requirements regarding well setbacks, noise abatement, visual impact, and penalties were preempted because they differed from state regulations, but upheld provisions regarding permitting, roads, and emergency response as consistent with the state’s requirements. 60 P.3d at 764-66. In BDS, the court ruled that local requirements imposing fines, financial guarantees, and records access were preempted because they were inconsistent with state regulations, but held that an evidentiary hearing would be necessary to determine the validity of other requirements involving water quality, soil erosion, wildlife, vegetation, livestock, cultural resources, geologic hazards, wildfire protection, recreation, and permit duration. 159 P.3d at 779-82.

Finally, two recent Colorado Supreme Court decisions had applied the preemption analysis delineated in Bowen/Edwards and Voss in other contexts. In Colo. Mining Ass’n v. Bd. of Cty. Comm’rs, 199 P.3d 718, 723-24, 730 (Colo. 2009), the court extensively relied upon Bowen/Edwards and Voss in determining that state law preempted a county from prohibiting the use of certain chemicals for mineral processing operations. In Webb v. City of Black Hawk, 295 P.3d 480, 489-93 (Colo. 2013), the court applied reasoning similar to Voss in holding that state law preempted a city from banning bicycles from certain streets.

City of Longmont v. Colorado Oil and Gas Association

In November 2012, Longmont voters approved Ballot Measure 300, which added Article XVI to Longmont’s home-rule charter. Article XVI prohibited hydraulic fracturing and the storage of hydraulic fracturing waste. Soon thereafter, COGA filed a lawsuit against Longmont seeking to invalidate Article XVI on the basis of preemption, arguing that hydraulic fracturing and the storage and transportation of hydraulic fracturing waste are matters of statewide concern. The Colorado Oil and Gas Conservation Commission and TOP Operating Company joined the lawsuit as plaintiffs, and several citizen groups intervened as defendants. The district court granted summary judgement to the plaintiffs, holding that the Conservation Act preempts Article XVI. Longmont then appealed the district court’s order to the Colorado Court of Appeals, which transferred the case to the Colorado Supreme Court.

Writing for a unanimous court, Justice Gabriel held that Longmont’s ban on hydraulic fracturing and the storage of associated waste is preempted because it operationally conflicts with the state’s statutory and regulatory oversight of this activity. See Longmont, ¶¶ 3 & 54. Justice Gabriel also suggests that these issues should usually be decided on summary judgment, explaining that “in virtually all cases, this analysis will involve a facial evaluation of the respective regulatory schemes, not a factual inquiry as to the effect of those schemes ‘on the ground.’” Id, ¶ 15.

For a home rule city like Longmont, the court must first decide whether a matter is of statewide, local or mixed state and local concern. This is determined by examining four factors: 1) the need for statewide uniformity of regulation, 2) the extraterritorial impact of the local regulation, 3) whether state or local government traditionally regulated the matter, and 4) whether the Colorado Constitution commits the matter to either state or local regulation. See Longmont, ¶ 20. The court found that the uniform statewide regulation and extraterritorial impacts of the fracking ban weigh in favor of the state, while Longmont has traditionally exercised zoning authority over land where oil and gas development occurs; accordingly, the court found that hydraulic fracturing is of mixed state and local concern. See id. at ¶ 31.

Next, the court turned to the issue of whether the local regulation conflicts with or is preempted by state law. Colorado case law recognizes three forms of preemption: express, implied, and operational conflict preemption. See Bowen/Edwards, 830 P.2d at 1056–57. The court concluded that neither express nor implied preemption applied. See Longmont, ¶¶ 44 & 45. In reaching this conclusion, the court rejected arguments that the state’s dominant interest in oil and gas development justified implied preemption and that the state has the exclusive authority to regulate the technical aspects of oil and gas operations. See id. at ¶ 47. The court agreed, however, that operational conflict preemption applies because the fracking ban would materially impede or destroy the state’s interest in the efficient and responsible development oil and gas. See id. at ¶ 53. This interest includes “a strong interest in the uniform regulation of fracking” as demonstrated by the state’s “pervasive rules and regulations, which evince state control over numerous aspects of fracking.” Id.

Citizen intervenors had posed a novel argument that the inalienable rights granted to citizens under article II, section 3 of the Colorado Constitution precludes the preemption of the fracking ban because it protects citizen rights. See Longmont, ¶ 57. The court dismissed this argument, stating that it would allow local regulations that promote citizen rights to always supersede state law and render the home-rule provision of the Colorado Constitution superfluous Id. at ¶ 59. The court found no authority for the adoption of such a concept under Colorado law.

City of Fort Collins v. Colorado Oil and Gas Association

Similar to the hydraulic fracturing ban in Longmont, Fort Collins voters approved a five year moratorium on hydraulic fracturing and the storage of hydraulic fracturing waste in November 2013. In response, COGA filed a lawsuit against Fort Collins seeking a declaratory judgment that state law preempts the moratorium. As in Longmont, the district court granted summary judgement to COGA, holding that the five year moratorium is preempted by the Conservation Act. Fort Collins appealed the district court’s order to the Colorado Court of Appeals, which transferred the case to the Colorado Supreme Court.

Justice Gabriel again wrote for a unanimous Supreme Court. Using the same preemption analysis applied in Longmont, the court concluded that the Fort Collins hydraulic fracturing moratorium involves a matter of mixed state and local concern. See Fort Collins, ¶ 16. It next determined that the moratorium operationally conflicts with the Conservation Act by “rendering the state’s statutory and regulatory scheme superfluous, at least for a lengthy period of time, because it prevents operators . . . from fracking until 2018.” Id. at ¶ 30. The court rejected Fort Collins’ arguments that a moratorium is different than a ban because fracking is a non-essential phase of production and a moratorium is only a temporary time out. The court noted that virtually all oil and gas wells in Colorado are fracked, and that the moratorium interferes with the state’s goal of permitting oil and gas pools to produce up to their maximum efficient rate of production, subject to the prevention of waste and consistent with the protection of public health, safety, and welfare. See id. at ¶ 33. It also explained that unlike moratoria that have been upheld in other contexts, the Fort Collins moratorium changes rather than maintains the status quo and covers a lengthy time period. See id. at ¶ 34. The court also emphasized that the moratorium is a prohibition and not a regulation and that it impedes the state’s interest in hydraulic fracturing. See id. at ¶ 37. The court expressed no view, however, on “the propriety of a moratorium of materially shorter duration.” Id. at ¶ 40.

Concluding Thoughts

The Longmont and Fort Collins decisions uphold Colorado’s longstanding preemption approach and clarify the proper analysis to be applied to determine whether state law preempts local regulation of oil and gas development. The court’s holdings confirm that local governments cannot prohibit hydraulic fracturing for a period of five years or longer, finding such bans materially impede or destroy the state’s interest in the efficient and responsible development oil and gas. The holdings also appear to encourage the resolution of these issues on summary judgment, which promises a faster and less costly process than the evidentiary proceedings contemplated in Bowen/Edwards. Whether these decisions will have a beneficial effect on future legislative and ballot battles over these issues remains to be seen.

The U.S. Forest Service is developing national policy to address mitigation of adverse impacts in National Forests and Grasslands and is seeking public input on this policy. This effort reflects the agency’s attempt to implement a November 3, 2015 Presidential Memorandum, “Mitigating Impacts on Natural Resources from Development and Encouraging Related Private Investment.” This memorandum directed all federal agencies, within 180 days of its issuance, to “adopt a clear and consistent approach for avoidance and minimization of, and compensatory mitigation for, the impacts of their activities and the projects they approve.”

On April 6, 2016, the Forest Service held a webinar and released a white paper titled “Seeking Recommendations in Formulating Agency Policy on Mitigating Adverse Impacts on National Forests and Grasslands.” In the webinar and white paper, the Forest Service explained that its forthcoming mitigation policy will consist of a “brief” regulation that establishes “clear goals” for the use of mitigation on National Forest System lands. Its policy will also consist of a “detailed set of directives” in the Forest Service Manual and Handbook that clarify the methods and tools of mitigation. The Forest Service anticipates it will publish a draft regulation for public review and comment in June 2016 and a final regulation in October 2017. The agency will release draft directives for public review and comment in late 2016 or early 2017 and will finalize the directives by November 2017.

Read More…

On February 25, 2016, the Bureau of Land Management (BLM) published proposed revisions to its resource management planning regulations, last revised in 2005. The proposed revisions fundamentally shift the land use management planning process from more local resource management planning to a sweeping landscape-scale approach that may make more difficult the analysis and consideration of local conditions, issues, and impacts. This Client Alert describes those proposed revisions and their potential impact on the resource management planning process.

BACKGROUND

Since May 2014, BLM has sought input on changing its land use planning process under the Federal Land Policy and Management Act (FLPMA)–specifically developing and updating Resource Management Plans (RMPs). Dubbed Planning 2.0, this initiative focuses on increased public involvement and use of current data and technology in making planning decisions.

BLM has proposed to overhaul its planning regulations in a manner that will fundamentally change the land use planning process potentially giving less deference to local concerns, impacts, and conditions to favor a new and broader landscape-scale approach that can lead to “one-size-fits all” requirements that may be impractical or even detrimental to particular local conditions. Some of the key proposed changes include:

Read More…

If you somehow missed the new Department of Transportation (DOT) Pipeline and Hazardous Materials Transportation Administration (PHMSA) requirements for unrefined petroleum product sampling plans (49 C.F.R. § 173.41, effective July 7, 2015), you are not alone (I stand with you!). First, there are a number of PHMSA rulemakings in varying stages of completion including, a broad new rule, not yet in effect, to apply new DOT requirements to petroleum gathering lines not previously regulated. Second, the new sampling plan requirement, when published in May of 2015, was largely either overlooked entirely or misunderstood to apply to only operators of rail terminals. However, the breadth of the new regulation is now becoming clear to operators large and small as PHMSA inspectors and trade and industry groups are beginning to spread the word about the requirements. Producers who ship unrefined petroleum products by rail, highway, air, or water must now, like refiners of petroleum products, develop and implement sampling plans for their unrefined petroleum products to meet the new regulation.

Read More…

The American Bar Association recently published its 2015 Private Target Deal Points Study, a survey of publicly available M&A transactions involving private target companies that closed in 2014. While each and every deal is unique with its own dynamics, this study is commonly used to inform “what’s market” in negotiations involving acquisitions of private companies. Below are selected highlights regarding key economic-centric transaction terms that are often considered by parties in negotiating acquisition documents.

Overview:

The study analyzes 117 acquisition agreements involving private company targets being acquired by public companies (compared to 136 in the last deal study, which was published in 2013 and covered transactions that closed in 2012), with transaction values ranging from $50 million to $500 million (with an average transaction value of $186 million and a median transaction value of $130.5 million). Asset deals comprised 17% of the study sample. We note that despite an overall strong pace for M&A deal volume in 2014, the number of transactions surveyed by this study actually decreased from the prior study, and the size range of the transactions was considerably narrower. This result is likely due to more transactions being completed by private company and financial buyers in 2014. Buyers also appear to be successfully narrowing the seller-favorable nature of some of the surveyed deal terms.

Highlights:

Purchase Price Adjustments: Purchase price adjustments at closing continue to be very common, but with a variety of metrics used to calculate such adjustments and fewer buyer approval rights prior to payment.

• Purchase Price Adjustments – 86% of the surveyed transactions include post-closing purchase price adjustments, and while the majority of adjustments were based on more than one metric, working capital (83%) comprised the most common metric used for such adjustments, with cash (38%), debt (33%), and a metric other than working capital, earnings, debt, assets or cash, respectively, being the next most common (41%).
• Estimated Payments at Closing – 89% of the surveyed transactions include payments at closing based on the seller’s estimate, and the buyer does not have an express right to approve the estimated payment amount 84% of the time (up from 74% in 2012).
• Separate Escrow for Post-Closing Purchase Price Adjustments– there is no separate escrow for post-closing purchase price adjustments 75% of the time (compared to 69% in 2012), with any true-up payment coming from the indemnity escrow 50% of the time (compared to 58% in 2012).

Earnouts: The popularity of earnouts stayed relatively consistent from 2012, but with less seller-favorable terms related to acceleration upon a change of control.

• Earnouts – 74% of the surveyed transactions do not have an earnout, but for those that do have an earnout, most earnouts are comprised of either earnings/EBITDA (39%) or a metric other than revenue or earnings/EBITDA (39%).
• Acceleration of Earnout – 65% of earnouts did not accelerate on a change of control (compared to 76% not accelerating on a change of control in 2012).

Indemnification: While the predominant survival periods stayed constant from 2012, there was a greater variety of survival periods than identified in prior years. Deductibles rather than “first dollar” baskets continued to be favored. Indemnification cap amounts of less than 10% of the transaction value continued to be the most common amount, but there was greater fluctuation for cap amounts greater than 10%.

• Survival/Time to Assert Claims (Generally) – the most common survival period for representations/warranties in general was 18 months (36% – down from 44% in 2012), followed by 12 months (23%) and 12 to 18 months (16%).
• Carve Outs to Survival Limitations – the most common representations/warranties or other concepts that were excluded from the general time limitation to assert a claim noted above, and which typically survive for a longer period of time, were the due authority rep (86% – up from 75% in 2012), due organization rep (80% – up from 67% in 2012), taxes rep (78%), capitalization rep (76%) and broker’s/finder’s fees rep (61%). Interestingly, fraud survived for a longer period of time than the general time limitation 58% of the time (compared to 42% in 2012), and a breach of the target’s covenants survived for a longer period of time only 40% of the time.
• Baskets – the most common type of basket was a “deductible” (65%), with “first dollar” being used only 26% of the time. The most common indemnification basket range was consistent with 2012, with the most common being 0.5% or less of the transaction value (52% of the time), followed by greater than or equal to 0.5% to 1% (38% of the time).
• Carve Outs to Basket – the most common carve outs for claims that would otherwise be subject to the basket were breaches of seller/target covenants (83% – up from 73% in 2012), due authority rep (85% – up from 70% in 2012), due organization rep (80% – up from 62% in 2012), fraud (80% – up from 61% in 2012), and taxes (74% – up from 56% in 2012).
• Cap Amounts as Percentage of Transaction Value – the median cap amount was consistent with 2012 (10%), with the most common amount being less than 10% of the transaction value (50% of the surveyed transactions). The next most common amount was between 10 and 15% of the transaction value, which appeared in 22% of the transactions (compared to such range appearing in 29% of surveyed transactions in 2012).
• Carve Outs to Cap Amounts – carve outs to the cap amount were generally consistent with prior years, with the most common being fraud (82%), a breach of the due authority rep (76% – up from 65% in 2012), due organization rep (69% – up from 56% in 2012), capitalization rep (65%), and the taxes rep (65% – up from 52% in 2012).

Escrows/Holdbacks: There were fewer escrows/holdbacks relative to 2012, but the most common amount of such escrows/holdbacks increased materially from 2012.

• Escrows/Holdbacks – 77% of the surveyed transactions included an escrow/holdback (down from 89% in 2012), with the most common amounts being in the 10 to 15% of transaction value range (23%), and 7 to 10% range (19%). These are materially higher than in 2012, when the most common amounts were in the 7 to 10% of transaction value range (24%) and 3 to 5% transaction value range (22%). The median escrow/holdback amount also increased slightly, with the median being 7.5% of transaction value compared to 7.14% of transaction value in 2012.

Note that some of the metrics in this summary are rounded, and some of the variances from prior years’ data may be due to differences in how data was analyzed by the study working group members from year-to-year. The information contained in this advisory should be read in conjunction with the 2015 Private Target Deal Points Study and the other studies referenced in this advisory, and is qualified in its entirety by such studies. The findings presented in this advisory do not necessarily reflect the personal views of the authors of this advisory or the views of Davis Graham & Stubbs LLP.

If you have any questions about this advisory, please contact one of the attorneys listed above.

On January 25, 2016, the Colorado Oil and Gas Conservation Commission (“COGCC” or “Commission”) approved rules for coordinating the work of the COGCC with local jurisdictions when large scale oil and gas facilities are proposed near communities and for facilitating municipal planning. These rules stem from Recommendations No. 17 and 20 of Governor Hickenlooper’s Oil and Gas Task Force and will become effective 20 days after they are published in the Colorado Register.

Over 16 months ago, Governor Hickenlooper issued Executive Order B 2014-005 establishing the 21-member Task Force to recommend measures for coordinating state and local regulatory structures to foster responsible energy development. After extensive debate and deliberation, the Task Force made nine recommendations. Two of them required COGCC rulemaking: Recommendation No. 17, which outlined a notice and consultation process between operators and local governments when a large oil and gas facility is proposed in an urban mitigation area; and Recommendation No. 20, which suggested an information sharing process between operators and municipalities to facilitate planning regarding oil and gas development.

Read More…

Today, the Department of Interior (DOI)/Bureau of Land Management (BLM) issued its much-anticipated proposed rule on venting, flaring, and leaking from oil and gas operations on onshore federal and Indian leases, along with a four-page fact sheet. DOI’s press release, which discusses the proposal largely in terms of air quality, notes that the rule will “help curb waste of our nation’s natural gas supplies, reduce harmful methane emissions and provide a fair return on public resources for federal taxpayers, Tribes, and States.” DOI is proposing to update NTL-4A by requiring operators to limit venting and flaring through new technologies, processes, and equipment including storage tanks, adopt leak detection and repair programs, and limit gas losses during liquids unloading. The proposed rule would also prohibit venting, except during emergencies and other limited exceptions–effectively implementing a “no venting” standard. Finally, the rule proposes to clarify when operators owe royalties on flared gas and allow BLM to set royalty rates at or above 12.5 percent of the value of production.

Read More…

Under the Wyoming Supreme Court’s recent ruling in Pennaco Energy, Inc. v. KD Company LLC, 2015 WY 152 (Wyo. 2015), parties assigning agreements pertaining to oil and gas development should be aware that, absent express language in the agreement to the contrary, they could remain responsible in the event of subsequent breaches by their assignees, even when those breaches occur years later.

The dispute in Pennaco surrounded several surface use and water storage agreements executed by Pennaco Energy, Inc. (Pennaco) and landowners in Johnson and Sheridan Counties, Wyoming, during the 1990s. The surface use agreements required Pennaco to make annual payments to the landowners, provide compensation for surface damages, and reclaim all wells on the covered lands upon termination of Pennaco’s oil and gas leases. The water storage agreements similarly required Pennaco to make annual payments, but also obligated it to construct certain pipelines and reservoirs. Pennaco complied with these obligations until 2010, when it assigned a portion of its interests in the agreements to CEP-M Purchase, LLC (CEP-M). Soon thereafter, CEP-M assigned all of its rights to High Plains Gas, Inc. (High Plains). Neither CEP-M nor High Plains made the required annual payments and both failed to comply with several other provisions of the agreements.

On December 9, 2015, EPA announced important changes to its environmental audit policy and voluntary disclosure program with the launch of its new eDisclosure portal (eDisclosure Notice) intended to streamline the disclosure process. Voluntary disclosure of potential or confirmed violations of federal environmental laws discovered through a qualifying audit must now be made electronically through the eDisclosure portal. Disclosures made pursuant to the New Owner Policy, however, must be submitted in hardcopy and confidential business information must be submitted in hardcopy to receive protection from public disclosure.

Read More…

Introduction

Imagine you are general counsel explaining to your management that the insurance benefits you thought the other party to a corporate transaction had assigned to your company to cover assumed liabilities are not actually available. Now you have major lawsuits pending against your company with no corresponding insurance benefits to provide defense or indemnity because your own company’s insurance will not respond to those claims. Worse still, the lawsuits also name the other party to the transaction, and a dispute is rapidly brewing between the companies concerning not only who is responsible to defend the claims asserted against both entities, but also who gets the insurance benefits. This would not be a pleasant conversation.

Read more…