Contract analysis

From: Harrison Caldwell <hcaldwell@calderwoodharkness.com> To: Derek Huang <dhuang@crestlinepackaging.com> Cc: Beatrice Holloway <bholloway@calderwoodharkness.com> Date: Wed, 12 Oct 2022 04:47:00 -0000 Subject: Phase II ESA Results — McKeesport Main Plant (2200 Iron Works Blvd.) — Preliminary Risk Assessment and Recommended Next Steps

**PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION**

Matter No. 1006-00003 — Crestline Packaging Solutions LLC / Allegheny Chemical Coatings, Inc.

We have completed our initial review of the Phase II Environmental Site Assessment analytical results for the McKeesport Main Plant located at 2200 Iron Works Boulevard, McKeesport, PA 15132, Allegheny County (Parcel ID 0383-M-00125-0000-00). I am writing to share our preliminary findings, flag several issues that will require near-term attention, and outline recommended next steps for both the environmental diligenc

As you know, TerraVerde Environmental Consulting LLC — Kevin O'Malley (Project Manager) and Alicia Reyes (Senior Scientist / Phase II Field Lead) — completed Phase II field work on September 26, 2022, consisting of 18 soil borings and 6 temporary monitoring wells. Laboratory analytical results were received from Keystone Analytical Laboratories on October 10, 2022.

The Phase II investigation was conducted to evaluate two Recognized Environmental Conditions (RECs) identified in TerraVerde's Phase I ESA dated August 15, 2022 (conducted under the ASTM E1527-21 standard):

1. **REC-1:** Elevated VOC readings in indoor air near the Building C mixing area, indicating a potential vapor intrusion pathway from residual subsurface contamination beneath the former underground storage tank (UST) field; and

2. **REC-2:** Staining and stressed vegetation along the eastern property boundary adjacent to the unlined stormwater drainage channel near the outdoor drum storage area.

For reference, the Phase I also identified one Historical REC (HREC): the 1994 PA DEP Act 2 filing for the former USTs (three tanks, 10,000 gallons each, removed in 1993), for which a No Further Action (NFA) letter was issued in May 2001 under the Statewide Health Standard for soils.

The Phase II results reveal several exceedances of applicable Pennsylvania Act 2 Statewide Health Standards that will require further evaluation and, in our judgment, likely remediation. Three primary areas of concern have emerged:

1. **Groundwater contamination** — Toluene detected at monitoring well MW-3 at levels exceeding the PA Act 2 Statewide Health Standard.

2. **Vapor intrusion** — Trichloroethylene (TCE) in sub-slab soil gas beneath Building C at concentrations exceeding PA DEP vapor intrusion screening levels — a finding with immediate worker health and safety implications.

3. **Soil contamination** — Lead and tetrachloroethylene (PCE) in soil at levels exceeding residential-use standards, though currently below applicable non-residential standards.

TerraVerde's preliminary remediation cost estimate for the McKeesport facility ranges from **$1.2 million to $2.8 million**, depending on the remediation approach and the extent of additional delineation required.

These findings will have material implications for the environmental risk allocation provisions in the draft Stock Purchase Agreement and should directly inform our negotiation strategy going forward. The detailed findings are set forth below.

Groundwater samples collected from the six temporary monitoring wells were analyzed for volatile organic compounds (VOCs) and metals. The most significant results were obtained from MW-3, located in the vicinity of the former UST field:

- **Toluene at MW-3:** Detected at **1,420 µg/L**. The PA Act 2 Statewide Health Standard for toluene in groundwater is **1,000 µg/L**. This represents a **42% exceedance** of the applicable standard.

- **Xylene at MW-3:** Detected at **8,200 µg/L**. The PA Act 2 Statewide Health Standard for xylene in groundwater is **10,000 µg/L**. While this result does **not** constitute an exceedance, the concentration is elevated and warrants continued monitoring.

The toluene exceedance at MW-3 likely indicates residual petroleum contamination from historical UST operations that was not fully addressed by the 2001 NFA closure. Notably, the HREC — the Act 2 NFA letter issued in May 2001 — was granted under the Statewide Health Standard for **soils**. Based on our review, the groundwater pathway may not have been fully characterized at that time. This raises the possibility that

## DETAILED FINDINGS — VAPOR INTRUSION (BUILDING C)

Sub-slab soil gas sampling was conducted beneath the Building C mixing area to evaluate the vapor intrusion pathway identified as REC-1 in the Phase I:

- **Trichloroethylene (TCE):** Detected in sub-slab soil gas beneath Building C at **42 µg/m³**. The PA DEP vapor intrusion screening level for TCE is **21 µg/m³**. This represents a **100% exceedance** — the detected concentration is **twice** the applicable screening level.

Importantly, TCE is not a primary chemical of concern associated with ACC's current coating and packaging operations. Its presence suggests a legacy source, most likely attributable to the pre-1987 use of the property as a steel fabrication facility operated by the former Keystone Metalworks (now defunct). TCE was widely used as a degreasing solvent in metal fabrication operations during that era.

This finding has several significant implications:

- **Worker health and safety:** The vapor intrusion pathway represents an active concern for workers in the Building C mixing area. **Patricia** — I would recommend that your team promptly evaluate whether current OSHA workplace exposure monitoring protocols at Building C are adequate in light of these results. If current monitoring does not cover TCE or is not being conducted at sufficient frequency or sensitivity,

- **Mitigation:** Remediation of the vapor intrusion pathway would likely require installation of a sub-slab depressurization system (SSDS) beneath Building C, a proven and commonly deployed technology for this type of condition.

- **Regulatory notification:** PA DEP vapor intrusion guidance may trigger regulatory notification obligations based on these exceedances. We are preparing a more detailed vapor intrusion risk assessment memorandum that will address notification considerations, the scope of any required mitigation, and the timeline for compliance. We expect to deliver that memorandum within the next several days.

## DETAILED FINDINGS — SOIL CONTAMINATION

Soil samples from the 18 borings were analyzed for VOCs, semi-volatile organic compounds (SVOCs), and metals. Two results are noteworthy:

- Detected at **3.8 mg/kg** - PA Act 2 **residential** Statewide Health Standard: **2.4 mg/kg** — **exceedance** - PA Act 2 **non-residential** Statewide Health Standard: **14 mg/kg** — no exceedance

Since the McKeesport facility is an active industrial property, the non-residential standard applies for purposes of evaluating current-use conditions. However, the residential exceedance would become relevant if Crestline (or a future owner) ever sought to change the use of the property, or if applicable standards were applied differently in the context of a regulatory proceeding or third-party claim.

- Detected at **680 mg/kg** - PA Act 2 **residential** Statewide Health Standard: **450 mg/kg** — **exceedance** - PA Act 2 **non-residential** Statewide Health Standard: **1,000 mg/kg** — no exceedance

The same use-based analysis applies. I would note for completeness that the facility is located within approximately 0.5 miles of the former Irwin Iron & Steel Superfund site (NPL-listed 1989, ROD 1996, construction complete 2004). However, TerraVerde's Phase I found no evidence of a hydrogeological or contaminant-migration connection between the two sites, and we do not believe the Superfund site is a contributing s

TerraVerde has prepared a preliminary remediation cost estimate for the McKeesport facility, which will be formalized in a report dated October 18, 2022:

| Scenario | Estimated Cost | Key Assumptions | |---|---|---| | **Low estimate** | **$1.2 million** | In-situ chemical oxidation (ISCO) for groundwater treatment at the former UST area; installation of sub-slab depressurization system for vapor mitigation at Building C | | **High estimate** | **$2.8 million** | Pump-and-treat groundwater remediation system (potentially longer duration); more extensive vapor mitigatio

Please note the following important qualifications regarding these estimates:

- They cover the **McKeesport facility only**. They do not include potential remediation at the **Clarksburg facility**, where Phase II investigation commenced on October 3, 2022, and analytical results remain pending from Keystone Analytical Laboratories (samples submitted October 7, 2022). TerraVerde (Kevin O'Malley) has confirmed that Clarksburg results are expected by approximately October 28, 2022.

- They do not include **asbestos abatement** costs, estimated at $180,000–$310,000 if full removal of asbestos-containing materials (ACM) is required — specifically, pipe insulation in Buildings A and B (approximately 2,400 linear feet) and floor tiles in Building A (approximately 14,000 square feet). These materials are currently managed under existing management-in-place programs.

- They do not include **lead-based paint abatement** costs, estimated at $45,000–$85,000 for the McKeesport office building (constructed circa 1955), also currently managed in place.

The Phase II findings materially inform the environmental risk allocation analysis for the proposed stock purchase of Allegheny Chemical Coatings, Inc. at the proposed $94.5 million purchase price. Several points merit emphasis:

**Successor liability in a stock transaction.** As we have discussed, in a stock deal Crestline would acquire all of ACC's environmental liabilities — known and unknown — as the successor owner of the facilities. Unlike an asset deal, there is no ability to selectively exclude environmental liabilities from the transaction. This makes proper risk allocation in the SPA critically important.

**Escrow and indemnification.** The toluene groundwater exceedance and TCE vapor intrusion pathway at McKeesport, when combined with the still-pending Clarksburg results, support a robust environmental escrow and indemnification position in the draft Stock Purchase Agreement. We should discuss the appropriate magnitude and duration of an environmental escrow, as well as the structure of any environmental-specific ind

**Lender requirements.** As you are aware, Commonwealth National Bank's commitment letter (signed July 8, 2022) conditions the $65 million senior secured term loan and $20 million revolving credit facility on satisfactory environmental diligence. Specifically, the commitment letter requires Phase I ESAs on all target real property with no RECs that are not adequately addressed, or acceptable Pollution Legal Liability

**Negotiation strategy.** We recommend that the team discuss whether and when to present these findings to seller's counsel, Hargrove, Dalton & Speer (Franklin Speer), in support of a purchase price adjustment or an enhanced escrow and indemnification request. The timing and manner of this disclosure should be coordinated carefully.

1. **Internal strategy call.** We should schedule a call with Derek, Patricia, and the C&H team (Beatrice, myself, and Grace) to discuss these findings in detail and align on strategy. I would suggest early the week of October 17 — please let us know your availability.

2. **Vapor intrusion risk assessment.** C&H is preparing a detailed vapor intrusion risk assessment memorandum addressing the TCE sub-slab soil gas results, regulatory notification considerations under PA DEP guidance, and mitigation requirements. We expect to deliver this memorandum within the next several days.

3. **Comprehensive environmental diligence summary.** We are preparing the master environmental diligence summary memorandum incorporating findings across all four facilities. This memorandum will remain in draft until the Clarksburg Phase II analytical results are received and analyzed.

4. **Risk allocation strategy.** We should begin formulating Crestline's negotiation position on environmental escrow and indemnification provisions for the SPA, informed by the $1.2M–$2.8M remediation estimate for McKeesport alone and the total estimated environmental liabilities across all facilities once the Clarksburg data is in hand.

5. **PLL insurance evaluation.** We recommend engaging with Whitfield & Calder Insurance Advisors (Douglas Whitfield and Lauren Petrov) and Ironclad Specialty Insurance Company regarding Pollution Legal Liability insurance as a potential supplemental risk transfer mechanism. The Phase II findings will be central to the underwriting submission, and we should initiate those conversations promptly to ensure adequate lea

6. **Briarwood Capital Partners update.** We recommend briefing Vanessa Moretti (Deal Partner, Briarwood Capital Partners) on these findings given their potential impact on the deal economics and Fund IV's equity contribution.

7. **Clarksburg results.** We will continue to monitor for the Clarksburg Phase II analytical results from Keystone Analytical Laboratories. TerraVerde (Kevin O'Malley) has confirmed that results are expected by approximately October 28, 2022, and we will circulate our analysis promptly upon receipt.

While the Phase II results are significant and require careful attention, I want to emphasize that findings of this nature are not uncommon for a facility with a decades-long industrial history and prior use as a steel fabrication site. The conditions identified at McKeesport are manageable with appropriate remediation technologies and proper risk allocation in the transaction documents — but they must be addressed s

Attached for your review is our **Preliminary Summary of Phase II Analytical Results — McKeesport Main Plant**, including a comparison table of detected concentrations against applicable PA Act 2 Statewide Health Standards. Our formal Phase II Results Analysis Memorandum for McKeesport is in preparation and will be delivered by October 14, 2022.

Please do not hesitate to reach out if you have any questions in the interim. I am happy to discuss at your convenience, and I would encourage us to get a call on the calendar for early next week.

**Harrison Caldwell** Of Counsel Environmental & Land Use Practice Calderwood & Harkness LLP 1900 Euclid Avenue, Suite 3200 Cleveland, OH 44115 Direct: (216) 555-4718 Email: hcaldwell@calderwoodharkness.com

**Attachments:** 1. Preliminary Summary of Phase II Analytical Results — McKeesport Main Plant (2200 Iron Works Blvd.) with PA Act 2 Comparison Table 2. Phase II Results Analysis Memorandum — McKeesport Main Plant (C&H internal memorandum, to follow October 14, 2022)

*CONFIDENTIALITY NOTICE: This email and any attachments are a privileged and confidential attorney-client communication sent by the law firm of Calderwood & Harkness LLP. This communication is intended solely for the use of the individual(s) to whom it is addressed. If you are not the intended recipient, or the employee or agent responsible for delivering this message to the intended recipient, you are hereby notifie