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Memo

To:	Dave Corliss and Toni Wheeler
From:	William F. Ford, Lathrop & Gage L.C.
Date:	November 25, 2008
Subject:	Updated Status of Former Farmland Nitrogen Facility in Lawrence, Kansas

Factual Background SUMMARY

The former Farmland Nitrogen Facility in Lawrence, Kansas is a 467 acre tract of land located on the southeast portion of the City on K-10 Highway (the “Site” or “Farmland Site”). This manufacturing facility opened in 1954. Farmland purchased the facility in 1984 and closed operations in 2001. Over the life of this facility, it manufactured various nitrogen fertilizer products. The Site has been the subject of periodic environmental investigations and clean ups for more than 30 years.

The most recent comprehensive characterization of the Site’s environmental condition is a draft Remedial Action Plan dated November 14, 2008 (the “2008 RAP”). According to the 2008 RAP, approximately 302 acres of the Farmland Site are either clean or sufficiently clean such that no further active remediation is anticipated on those portions of the Site.

According to the 2008 RAP, approximately 167 acres of the Site are in need of further active environmental remediation. The types of contamination found on the Site include soil, groundwater, and surface water contamination. The contaminants at the Site include nitrogen compounds, ammonia, petroleum hydrocarbons, and various heavy metals. The primary contaminants are nitrogen compounds and ammonia.

There is ongoing monitoring of the Site’s condition and planning for environmental remediation of the Site. This monitoring and environmental remediation is currently being pursued by a Remediation Trust set up through the Farmland bankruptcy and is monitored primarily by the Kansas Department of Health and Environment (“KDHE”). The most recent time estimates are that KDHE will finish its review of the 2008 RAP and complete the choice of a final remedy for the Site through a Corrective Action Decision outlining that final remedy in the Spring of 2009.

The 2008 RAP proposed by the Remediation Trust to KDHE is a revision and refinement of an earlier RAP submitted in December of 2007. The 2008 RAP contemplates the following remediation activities will need to occur on certain portions of the Site over the next 30 years: 1) Continued operation of a groundwater containment system, 2) Imposition of land use restrictions to control future uses on the Site, 3) Continued monitoring of Site conditions, 4) Stormwater management, 5) Excavation and management of certain soils at the Site, and 6) Closure of certain former industrial ponds on the Site.

The 2008 RAP estimates that the cost of these planned environmental remediation activities will total approximately $12 Million over 30 years. Prior cost estimates have ranged from $4 Million to $15.3 Million. In addition to these remediation costs, there will be various other costs, including demolition costs that have previously been estimated at $1.4 to $3.9 million. KDHE has not yet commented on the 2008 RAP or its cost estimates.

farmland bankruptcy

Farmland Industries filed for bankruptcy in May 2002. The Bankruptcy Court approved Farmland’s liquidating plan in December 2003. Pursuant to that plan, Farmland created a Remediation Trust to hold four pieces of property in the state of Kansas that were subject to ongoing environmental remediation obligations supervised by KDHE. Those properties included the Site and properties in Hutchinson, Topeka, and Wichita. KDHE and Farmland estimated the costs for remediation of these four properties and placed monies within the Remediation Trust to pay for that remediation and the administrative costs associated with these four properties. KDHE is designated the primary beneficiary of that Remediation Trust and considers the money in the Remediation Trust as a financial assurance that the environmental clean ups will occur at the various properties. The Remediation Trust is only obligated to clean up the Site to the amount of the existing trust funds. There is currently $10.5 Million in the Remediation Trust in combined remediation and administrative funds allocated to the Site.

The Remediation Trust also provides a process by which the properties within the trust may be sold, and the trust continues to exist until the properties have either been cleaned up or they have been sold under the trust terms. Properties can be sold under the Remediation Trust agreement only with KDHE approval (except in very limited circumstances), and any sale will likely require Bankruptcy Court approval. At this time the only two properties remaining in the Remediation Trust are the Farmland Site and the Hutchinson property.

The properties held by the Remediation Trust are to be sold through a Bankruptcy Court-approved sale process. The sale process begins by submitting bids to the Remediation Trust. The Remediation Trust evaluates all bids and may choose to select a bid as the “stalking horse” bid to present to the Bankruptcy Court for preliminary approval. The Remediation Trust will ask the Bankruptcy Court to establish bidding and auction procedures pursuant to which potential buyers may make competing bids for the property. If there are no competing bids, the Bankruptcy Court likely will authorize the sale to the stalking horse bidder. If there are competing bids, the Remediation Trust will conduct an auction and ask the Bankruptcy Court to approve the sale to the winning bidder.

city OF LAWRENCE goals for the farmland site

The Farmland Site is a substantial and high profile piece of property with significant potential for jobs development in the region. The City’s goals for the Site are outlined in the Farmland Industries Redevelopment Plan approved by the City Commission on March 11, 2008. These goals include ensuring the proper completion of the environmental remediation of the Site. Similarly, the City is interested in making sure that the Site is not sold off in a piecemeal fashion, leaving only the most contaminated portions as undevelopable land. In general, the City wants productive and appropriate uses for the Site as quickly as possible. Towards these goals, the City Commission approved the Farmland Industries Redevelopment Plan and has also voted to proceed with annexation of the Site.

The most effective method to achieve the City’s goals for the Site may be through City ownership of the Site. Therefore, on July 3, 2007, the City Commission authorized a bid to purchase the Site in order to commence the auction process and set the format for a Bankruptcy Court auction. The City thereafter submitted to the Remediation Trust a bid to purchase the Site. That bid provided that the City would obtain ownership of the Site but assume no responsibility for the clean up of the existing Site conditions; rather, the Remediation Trust would remain in place to perform the Site remediation. The Remediation Trust did not accept the City’s bid to start the auction process, and KDHE did not approve of the format of that bid

In late October 2008, KDHE distributed a draft Consent Order setting out obligations that it will require any purchaser of the Site to satisfy. These obligations are primarily those contained in the 2008 RAP being negotiated and the Corrective Action Decision anticipated from KDHE in the Spring of 2009. This draft Consent Order from KDHE anticipates that any purchaser will assume the obligation to perform the remedy for the Site and will not be able to leave that responsibility with the Remediation Trust. In exchange for assumption of these clean up obligations a purchaser would obtain title to the Site and a covenant from KDHE that KDHE will not sue the purchaser to perform any other clean up not required by the Consent Order.

If the City chooses to submit a new bid at this time in another attempt to start the auction process and acquire the Site, such a bid would be under the structure of the current proposed draft KDHE Consent Decree. The bid would involve accepting a substantial portion of the Remediation Trust funds in exchange for the City getting title to the Site and accepting the remediation obligations, with closing contingent on being able to negotiate an acceptable Consent Order with KDHE and a similar agreement with EPA. The City’s primary financial risk in purchasing the Site under such a revised bid would be the amount (if any) by which the ultimate clean up costs exceeds the amount of the Remediation Trust funds that the City would receive at the closing. . As noted above, these costs will be incurred over the course of 30 years. The City would, of course, have to pay the demolition costs at the Site

Even if the City’s bid is not chosen for the “stalking horse” bid to begin the auction process, the City should have the opportunity to bid in any auction of the Site. When the auction begins, the City may choose to bid or may choose not to bid depending on the structure of the bid format chosen and on the economics of the bidding process. At the present time there is no auction process or date set, and there is no time frame for when the City can confidently predict that such an auction might occur.

Once the Remediation Trust selects a “stalking horse” bid, the auction likely will take place within 60 to 90 days. With closing on any purchase contingent on negotiation of an acceptable Consent Order with KDHE, and a similar agreement with EPA, even assuming an auction takes place in 60 to 90 days, a sale closing may not occur for at least 180 days given anticipated KDHE and EPA time frames for action.

cc: John Coghlan, Lathrop & Gage L.C.

Brian Fenimore, Lathrop & Gage L.C.