BP Exploration & Production Inc.'s recent agreement to settle federal and state claims related to the 2010 Macondo blowout and spill improves the company’s financial outlook, according to Moody’s Investors Service.
“While the settlement is large, we view the scope and extended payout terms as important and positive developments for BP, allowing it to move forward with a lot more certainty around the size and cash-flow burden of its legal liabilities,” said Moody’s Senior Vice-Pres. Tom Coleman in press statement announcing a ratings upgrade.
“It will also help clarify a stronger core operating and credit profile for BP as it moves into a post-Macondo era.”
BP E&P’s agreements in principle with federal, state, and municipal governments provide for payments totaling as much as $18.7 million to settle most major claims, with payout periods of 15-18 years (OGJ Online, July 2, 2015).
BP Corp. North America and BP PLC will guarantee the payments, Moody’s pointed out, avoiding the need for bonding, letters of credit, or other collateral and leaving unencumbered BP’s cash of $32 billion.
The ratings firm said payments totaling $5.5 billion over 15 years to settle Clean Water Act fines and penalties are “well towards the lower end of a potential range given the gross negligence finding against BP.”
Other major payments are $7.3 billion to the federal and state governments for natural resource damage and $4.9 billion to settle claims of the coastal states, spread over 18 years. Payments to local municipalities could reach $1 billion.
Most payments, except for Clean Water Act fines, are tax-deductible, Moody’s said. Some payments will be paid from funds remaining in the Deepwater Horizon Trust Fund.
The settlement will result in additional pretax charges to BP’s income in the second quarter of 2015 totaling about $10 billion. This will bring the company’s total charges related to the Macondo disaster since 2010 to $53.5 billion.
“The additional charge can be absorbed by BP’s balance sheet, with a current book equity in the area of $111 billion,” Moody’s said. It added: “The extended payout terms will considerably smooth out and ease the impact of the payments on BP’s cash flow from operations, resulting in annual outflows in the area of $1.1 billion, a supportable amount in the context of BP’s $30 billion cash-flow profile.”
The settlements also “greatly reduce the overhang of Macondo liabilities and allow BP to move forward and better focus on its core operations after a long period of restructuring and retrenchment.”
Moody’s noted that the company has divested assets worth more than $38 billion since 2010. BP still faces smaller, unresolved claims and the possibility the broad settlement won’t be concluded as initially agreed.