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With Environmental Awareness On The Rise, Companies Seek To Adapt To New Risk, Academic Panelists Say

Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf

Factbox: Oil, Gas Production Declines Intensify as Hurricane Michael Approaches


With Environmental Awareness On The Rise, Companies Seek To Adapt To New Risk, Academic Panelists Say

Institutional investors are looking for new ways to decarbonize portfolios and shift capital to more sustainable assets without sacrificing returns, said panelists at S&P Global's most recent Academic Council meeting. The significant increase in mandated capital with the environmental, social, and governance (ESG) focus has led S&P Global Ratings to develop new evaluation tools that aim to provide relative measures of environmental and social impacts, climate resilience, and corporate governance that investors can use in their own assessment of a project's or company's long-term value and financial performance.

S&P Global Ratings proposed asset- and entity-level sustainability evaluation frameworks in September 2016 and has been seeking feedback to ensure that the tools are useful to capital market participants (see "Proposal for a Green Bond Evaluation Tool", and "Proposal for Environmental, Social and Governance (ESG) Assessments.

In particular, the asset-level Green Evaluation will give investors "a more complete picture of the relative environmental attributes of their portfolios and their exposure to climate risks," panelists said. The evaluation proposal goes beyond current assessments of transparency and governance of a "labeled green" bond and takes into account the location of the investment as it relates to the carbon intensity of the local grid; environmental cost of construction and decommissioning; technologies used; and an asset's lifetime.

The entity-level ESG Evaluation is intended to assess a company's impact upon the natural and social environments it inhabits; the effects of those environments upon it; and the governance mechanisms the company has in place to manage and oversee both risks and opportunities that are identified through the ESG assessment.

Listed industrial companies comprise the initial phase of calibrating the ESG Evaluation framework as they have a greater environmental footprint as well as a significant diversity of social impacts. Subsequent phases will include a wider census of corporate entities, including financial institutions.

Although these initiatives present a relatively novel way to evaluate companies, sustainability isn't new to financial markets. It's been a factor in credit and financial analyses for over two decades. Since 1999, S&P Dow Jones Indices--a division of S&P Global--has been a leading provider of sustainability indices that meet various investor needs. S&P Dow Jones Indices pioneered a number of innovative concepts such as carbon-efficient, ESG smart beta, long-term value creation, and other indices based on industry-specific and financially material criteria.

The global debate on environmental, social, and governance impacts continues to intensify, leading to many regulatory initiatives and nongovernmental proposals. The Paris Agreement, effective Nov. 4, 2016, has set a target to limit the rise in global temperature to no more than two degrees Celsius above pre-industrial levels.

This has significant cost and credit implications for issuers, many academic and S&P panelists said.

Consequently, many corporations are reevaluating their sustainability practices and making efforts to reduce their carbon footprint. "Labeled green" bonds is currently the principle debt financing instrument, where the proceeds are exclusively applied to carbon-reduction projects. Panelists expect the market for this financing tool to grow to over $100 billion in 2017. Although still nascent and relatively small, this market will expand significantly, S&P Global Ratings and guest panelists believe, in part thanks to the new Green Evaluation framework that is being designed to assess all bonds (not just those labeled "green") for their environmental impact and climate resilience.

As currently envisaged, both Green Bond Evaluations and the ESG Assessments will provide periodic monitoring after the initial scores are set.

Academic Council members had a variety of questions regarding these proposed frameworks. One question was how S&P Global Ratings will assess companies with a larger carbon footprint, such as those in the oil and gas, extractive, and manufacturing sectors. Will relative performance as well as absolute performance be analyzed? S&P Global Ratings attendees responded that net positive and net negative impacts of projects financed by a green bond would be one way that absolute and relative impacts will be calculated.

Another question raised by Academic Council members related to the various weightings of the pillars of ESG assessments and whether, for example, governance should not receive the highest weighting on the basis that board and management direct corporate conduct and bear the key responsibility for a company's environmental and social footprint.

S&P Global Ratings attendees responded that ESG assessment weightings are under constant review at this preliminary stage but noted that if a management and governance assessment was weak, then this would cap the environmental and social risk management assessment pillar as weak. In addition, a company's social risk profile is a significant contributor to the overall assessment as well.

S&P attendees emphasized that analysts and rating committees currently take into account environmental, social, and governance risks in credit ratings when they judge them material to a rating or outlook. S&P Global Ratings assess ratings impacts of matters such as climate change (e.g. rising sea levels), pollution (e.g. legal liability and regulatory infractions), resource depletion, and employee, customer, and community relations, along with governance deficiencies that adversely affect corporate reputation, which in serious cases could impair access to the credit markets.

Academic Council panelists recognized that ESG market opportunities and challenges are complex and are not always broadly understood. A key goal for S&P Global is to push for greater transparency through better sustainability data, tools, standards, and benchmarks to help investors make more informed decisions.

Writer: Beth Steffens



Multiple Operators Suffer Damage to Fiber Networks from Hurricane Michael

Communications providers are working to restore services in areas impacted by Hurricane Michael, but storm debris, power outages and significant fiber damage are hindering progress in those counties most devastated by the storm.

As of Oct. 14, a number of counties along the Florida Panhandle had more than half of their cell sites down, including Bay County — home of Panama City and Mexico Beach, described as "ground zero" of the storm by U.S. Federal Emergency Management Agency administrator Brock Long — where 66.1% of cell sites were down. Similarly, neighboring Gulf County had 69.6% of cell sites down, according to data from the U.S. Federal Communications Commission.

Based on the amount of damage in the area and ongoing power outages, it could be weeks before services are restored. Long said Oct. 12 that after search and rescue, restoring communications in impacted counties is among FEMA's top priorities.

"You have to be able to communicate to appropriately respond and we are trying to do everything we can to get the private sector vendors, the Verizon [Communications Inc.]'s of the world, to get in to try to get their systems back up and running," he said.

Long added, however, that the process is not easy. "There was a tremendous amount of debris. When you look at the damage in Mexico Beach, that is where the ocean rose potentially 14 feet … and shoved buildings out of the way. When you have that type of damage, it takes time to get in and go through," he said.

Hurricane Michael made landfall Oct. 10 near Mexico Beach as a Category 4 hurricane with 155-mile-per-hour winds.

For its part, Verizon said the "vast majority" of Florida and Georgia service has been restored, with 99% of the company's network in Georgia in service and 97% of its network in Florida. But the company noted there are pockets, particularly near Panama City, where the damage is severe.

"The storm caused unprecedented damage to our fiber, which is essential for our network — including many of our temporary portable assets — to work. Our fiber crews are working around the clock to make repairs, and while they are making good progress, we still have work to do to get the fiber completely repaired," the company said Oct. 14.

Fiber is the connecting component of a network that carries data from point to point. It is necessary for Verizon's permanent and temporary cell sites to be operational. The company noted that while it has multiple fiber paths to carry data, "The severity and intensity of the storm caused damage to all duplicate routes in the Panama City and Panama City Beach area."

In terms of wireline services, the FCC said 291,300 subscribers remain out of service as of Oct. 14, including 205,643 subscribers in Florida. The figures were down from a day earlier, when a total of 337,223 subscribers were without service, including 233,843 in Florida.

The top residential video and broadband provider in Bay County is Comcast Corp., according to MediaCensus data from Kagan, a research group within S&P Global Market Intelligence. Comcast, the largest cable operator in the U.S., said in an Oct. 12 statement that it is working to get Xfinity services back online.

"As power returns … and it becomes safe for our technicians and restoration crews, we will work to repair any damages affecting our network," the company said.

As of Oct. 15, more than 162,000 customers in Florida remained without power, including all 27,275 customers served by Gulf Coast Electric Cooperative. The cooperative said in an Oct. 12 Facebook Inc. post that its distribution system "suffered catastrophic damage"

In Gulf County, the top residential video provider is AT&T Inc.'s satellite video service DIRECTV, according to MediaCensus data, while the top residential broadband provider is Mediacom Communications Corp., the fifth-largest cable operator in the U.S.

Mediacom said Oct. 14 that its recovery efforts are underway but its network in Florida has 14 miles of severely damaged fiber near Walton County, as well as 25 miles of damaged fiber east of Panama City that is obstructing video transmission from Gulf County to Walton County.

"Our current priority remains focusing on repairing damage to our high-speed data transport network and main transmission facilities and repairing downed lines where we have access to the area. We have outages from widespread loss of commercial power along with downed lines, and structural damage throughout our systems," the cable operator said.



Factbox: Hurricane Michael Impact Turns from Production Loss to Demand Destruction

Houston, Oct. 11 2018 — Hurricane Michael made landfall at the Florida panhandle as a Category 4 hurricane Wednesday with 155 mph winds, quickly destroying demand for power, natural gas and refined oil products. Shut-in oil production rose modestly from Tuesday to over 700,000 b/d, but the storm has stayed east of much of the region's production, which means supply should be back online quickly.

Meanwhile, the severity of the storm has surprised to the upside, which could a mean longer lasting and more severe impact on demand for power, natural gas, refined products and ultimately crude oil.

"We expect the impact on refined products demand to be below that of previous hurricanes in the Gulf Coast such as Harvey in 2017, as the region impacted by Michael has lower population density than Houston ... Nevertheless, the impacts are favoring the high side of our estimates given the sheer severity of the storm," said Claudio Giamberti, Head of Demand and Refining at S&P Global Platts Analytics.

As of 7 pm EDT, the eye of Michael was moving over southwestern Georgia with maximum sustained winds still at 100 mph, according to the National Hurricane Center. The storm is expected to move northeast across the Carolinas before heading back out to sea Friday morning.



Factbox: Utilities, Oil Producers Brace for Hurricane Michael Along U.S. Gulf

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall on the Florida Panhandle as a Category 3 storm Wednesday, offshore oil and gas producers were busy evacuating crews and shutting in production Monday. By mid-day, nearly 20% of Gulf of Mexico oil production had been taken offline. That number will likely have risen when reported Tuesday as operators continued to shut down platforms Monday afternoon.

Meanwhile, just 24 days after Hurricane Florence made landfall, electric utilities were gearing up for Hurricane Michael restoration efforts by staging crews and supplies in the storm's path. Lost power demand is likely to have a knock-on effect on natural gas demand and prices.

After it brings over 100 mph winds to the western-most portion of Florida, Hurricane Michael is expected to turn northeast, bringing wind and rain to Alabama, Georgia and the Carolinas before heading back out to sea. Thiis article covers the key takeaways across commodities.



Factbox: Oil, Gas Production Declines Intensify as Hurricane Michael Approaches

Houston, Oct. 09 2018 — With Hurricane Michael expected to make landfall Wednesday mid-day in the Florida panhandle as a Category 3 hurricane, oil and gas producers continued to shut in production Tuesday, leading to a drop in output and rise in prices.

Shut-in Gulf of Mexico oil production more than doubled from Monday to nearly 700,000 b/d Tuesday. That drop in output contributed to WTI rising to nearly $75/b, with Gulf Coast sour crude Mars rising concurrently.

Natural gas prices followed suit, with Henry Hub reaching its highest level since January. That strength could be short lived as power outages lead to falling demand for natural gas for generation.