Environmental concerns linked to chemicals known as per- and polyfluoroalkyl substances (PFAS) are rising. PFAS-related litigation, global legislative attention, and investor queries to S&P Global Ratings appear to be increasing as well. This focus is tied in part to rising general awareness and perception of potentially harmful environmental effects of certain PFAS.
The concerns center on a handful of the thousands of PFAS. Their relatively well-established performance characteristics led to their use in several applications, including water-resistant clothing, nonstick cookware and appliances, food packaging, and firefighting foam.
The still-evolving knowledge of their potential harmful effects is a key distinction between the environmental problems posed by some PFAS and more well-known environmental issues linked to asbestos and lead. This evolving knowledge creates an important credit risk: Potential environmental liabilities and costs for both current and legacy PFAS producers and processors may only be emerging.
Several national governments, the U.N., and local authorities increasingly consider some PFAS--such as perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS)--harmful to human health. These synthetic (human-made) chemicals are sometimes referred to as "forever chemicals" for their persistence and inability to break down in the environment and human body. The presence of certain PFAS (such as PFOA) in drinking water sources, several consumer products, and packaging has become especially controversial. Several current and legacy PFAS producers and processors deny their role in allegations of personal injury and environmental damage. They also dispute some of the alleged harmful effects of these chemicals. (Appendix).
In this article, we summarize our credit views on a wave of litigation and environmental issues related to these chemicals and credit risks from their links to certain rated companies. We focus selectively on companies with high PFAS-related ongoing environmental litigation and investor interest, based on queries we have received:
- The Chemours Co. (BB-/Stable/--);
- Chemours' former parent DuPont (E.I.) De Nemours & Co. (EID; A-/Stable/A-2);
- EID's parent Corteva Inc. (A-/Stable/--);
- Dupont de Nemours Inc. (A-/Watch Neg/A-2), which owns some of EID's legacy business; and
- 3M Co. (AA-/Watch Neg/A-1+).
We also briefly summarize issues related to Europe-based companies not part of the growing PFAS environmental litigation in the U.S., but which appear to have caught the attention of the U.S. Environmental Protection Agency (EPA), including Arkema S.A., BASF SE, Clariant AG, and Solvay S.A.
What prominent litigation is underway related to these chemicals?
- PFOA lawsuits: Defendants include EID, Chemours, and 3M. Plaintiffs include several individuals and U.S. state governments.
- Aqueous film forming foam (AFFF; aka PFAS) lawsuits: Defendants include EID, Chemours, and 3M. Plaintiffs include several water utilities, state governments, and local bodies.
- A lawsuit filed by Chemours against former parent EID, Corteva, and DuPont de Nemours, to (among other things) limit or end the indemnification by Chemours for liabilities related in part to these chemicals.
Name some key PFAS-related regulatory actions. How could these affect our credit ratings?
In 2019, a U.N. convention on pollutants proposed a ban (with certain exemptions) on PFOA. Signatories set May 2020 as a deadline. In November 2019, the European Union (EU) published a draft act banning PFOA. The U.S. was not a signatory. But the EPA reports that in 2006 it invited "eight major leading companies in the PFAS industry" to commit to ending PFOA production and use by 2015. The EPA website on Jan. 31, 2020, indicates these companies including Arkema, Asahi Glass, BASF Corp., Clariant, Daikin Industries Ltd., 3M, EID, and Solvay as compliant.
The proposed U.N. legislative and EPA actions focus on one type of PFAS (PFOA) and exclude others. We believe the likelihood of regulatory action is high for other PFAS (e.g., PFOS, GenX) not addressed in current legislation. PFOA's legacy accumulation remains a controversial issue, not addressed in these regulatory actions. For instance, thresholds of acceptable levels of PFOA in water sources differ across Europe and U.S. states. This suggests regulatory actions will continue.
The credit risks related to regulatory actions for the rated companies discussed here include the potential for new liabilities (from penalties or noncompliance, for example) or new costs (such as remediation). The actions could affect our ratings on companies where we believe new liabilities or costs would weaken credit metrics.
What are S&P Global Ratings' views on PFAS issues and litigation at Chemours, EID/Corteva, and DuPont?
These companies face a variety of lawsuits and allegations, including those related to alleged personal injury, site contamination, and securities violations. The chemicals involved include PFOA, PFOS, and to a lesser extent currently produced or used PFAS such as GenX, which the companies say is safer than PFOA.
EID (owned by Corteva) states it produced PFOA in the past but that it no longer does. Chemours, spun off from EID in 2015, states it never produced PFOA, but is involved because it indemnified EID at the spinoff. DuPont de Nemours (formerly DowDuPont Inc.) owns businesses formerly owned by EID. All these companies say they never produced or marketed AFFF, which is the alleged source of PFOS contamination, in many lawsuits.
In our view, Chemours faces the greatest risk because of indemnifications to EID, its previous parent. EID, Corteva, and DuPont essentially state that the indemnity provided by Chemours covers them. EID and Chemours are subject to more litigation related to these chemicals than most rated companies.
The personal injury allegations, including those linking PFOA contamination to cancer and birth defects, have attracted the most media attention. The personal injury lawsuits against these companies are at a relatively early stage, which makes it difficult to reasonably estimate potential liabilities. Based on the absence of any judgement, we assume liabilities and/or expenses arising from these lawsuits might not significantly hurt Chemours' credit quality because the lawsuits--about 60 so far--are far fewer than the approximately 3,500 PFOA-related previous personal injury lawsuits settled by Chemours and EID in March 2017, for a total of about $671 million. EID funded half the settlement while maintaining that it was indemnified by Chemours.
Any liability or settlement for ongoing PFOA cases lower than or at the previous PFOA settlement would not weaken leverage significantly at Chemours. Under this assumption, the liability or settlement would be funded by debt. We assume about $1 billion in 2020 EBITDA for Chemours. We emphasize there is no way of knowing the outcome of the ongoing cases at this early stage. We will view an increase in the number of lawsuits, or new revelations about potential liabilities, as raising credit risks.
AFFF lawsuits allege firefighting foams used in areas such as military bases and airports released toxic PFAS (mainly PFOS and PFOA) and contaminated the environment. These cases contributed to the U.S. House of Representatives' passing the PFAS Action Act in January 2020, which proposes to phase out the use of PFOS-based AFFFs on military bases (among other things). The U.S. administration says it "strongly opposes" this bill (HR 535), so for now the legislative response is unclear.
The more than 100 AFFF lawsuits are also at a very early stage. There is no reliable estimate of liabilities or costs that could arise. We do not have a history of legal settlements like we do in the EID/Chemours PFOA settlement. At this stage, S&P Global Ratings does not assume additions to our adjusted debt at Chemours related to these lawsuits. That is not a view on the legal merit of the lawsuits, only that it is too early to make reasonable assumptions about outcomes or amounts (if any). That could change as they progress through the legal system.
Similarly for other lawsuits and allegations, including those for site contamination and securities violation (which are related to PFAS disclosures), there is not sufficient information to accurately estimate a liability amount beyond contingent liabilities provided for in financial reporting. We view the tax-adjusted contingent liabilities as debt-like in our leverage calculation. These lawsuits and potential new liabilities are ongoing credit risks in our ratings on Chemours in particular.
Although we believe Chemours faces the greatest credit risk, we recognize that all these companies could face credit risks, including potential creation of new liabilities or damage to reputations from being associated in public consciousness with PFAS-related environmental hazards. Changing public perceptions and awareness, combined with the potential for legislative or regulatory responses, contribute to these risks.
What does S&P Global Ratings think of the lawsuit filed by Chemours against its former parent and related entities?
It's clear that Chemours indemnified EID for several environmental liabilities. We interpret this arrangement to mean Chemours is ultimately liable for several potential environmental issues, including those arising from PFOA related to EID's legacy business. (EID is liable for very small amounts as part of a limited sharing agreement with Chemours.) Given this view, we do not consider the PFAS lawsuits to be significant credit factors in our ratings on EID, Corteva, and DuPont. Chemours' lawsuit seeks (among other things) to cap or eliminate its potential liability or to get a refund of the nearly $4 billion dividend it paid out at the time of the spinoff.
The outcome of this lawsuit or of any associated settlement is unclear. From a credit standpoint, a change in the status quo would benefit Chemours, but could be viewed as a credit negative for EID/Corteva or DuPont de Nemours if those entities assume related liabilities or expenses. But any favorable outcome for Chemours is far from guaranteed. We therefore assume no, benefit to credit quality at Chemours and no impairment of credit quality at EID/Corteva or DuPont de Nemours.
Can you provide more specifics on S&P Global Ratings' view of the credit impact on Chemours?
We view PFAS-related environmental and litigation as a credit negative at Chemours. We add all contingent liabilities (including PFAS-related) provided for by the company to our adjusted debt amount after adjusting for taxes (we assume a 21% rate). That includes (as of Sept. 30, 2019) environmental liabilities of $239 million, litigation liabilities of $117 million, and environmental remediation of around $55 million that Chemours provides in its financial reporting. These liabilities combined are less than half of our estimated 2020 EBITDA of approximately $1 billion, and do not increase our adjusted leverage meaningfully.
After accounting for these liabilities, we expect the weighted-average ratio of funds from operations (FFO) to total debt to approach 20% in 2020, which we consider appropriate for the rating. In addition, Chemours reports an unprovided $570 million that it characterizes as the maximum possible contingent liability, with a low likelihood of materializing. We do not add this amount to our adjusted debt calculation because we believe there is insufficient information to estimate the likelihood of a further amount. However, we believe our estimation that FFO to debt will approach 20% at year-end 2020 creates some cushion at the rating for an increase in liability by $570 million, given our threshold for a potential downgrade of 15%.
What is S&P Global Ratings' view on PFAS-related credit issues at 3M?
3M is the defendant in many lawsuits surrounding its use of PFAS and faces a number of lawsuits regarding AFFF. In response, 3M has made sizable payments and committed to continued research and potential remediation where the materials were manufactured and/or disposed. In response to one lawsuit, 3M issued an $850 million grant to the state of Minnesota. The charges to date, however, have had minimal effect on the company's credit metrics. While 3M states it began phasing out the use of PFOA and PFOS, and was the first of its peers to do so, we believe there remains a substantial liability surrounding PFAS. The precise timing and size are unknown, thus we have not incorporated specific amounts into the rating. If PFAS is ultimately designated a "hazardous substance" under the Comprehensive Environmental Response, Compensation, and Liability Act, better known as the Superfund law, it would begin to clarify potential cleanup obligations. At the same time, we believe milestones in the federal case related to AFFF could weigh on the rating.
How will other legacy or current producers of this chemical be affected?
This is not a material credit issue at the following Europe-based companies, invited by the EPA to end their global manufacture and use of PFOA: Arkema, BASF, Clariant, and Solvay. Their compliance with the EPA plan (as indicated on its website) suggests they undertook actions in advance of the proposed EU ban on PFOA. None of these companies have highlighted the production or use of other PFAS under current reporting requirements.
Litigation related to these chemicals appears to be much more prevalent in the U.S. than Europe. One reason could be that major producers (and inventors) of these chemicals were U.S.-based. Still, this is an evolving issue in Europe. For instance, Denmark has proposed a ban effective 2020 on all PFAS in certain materials used in food packaging. Although associated credits risks may appear to be low now, we will continue to monitor them.
- PFAS: Per- and polyfluoroalkyl substances are a group of several thousand chemicals that includes PFOA, PFOS, Genx, and others.
- PFOA: Perfluorooctanoic acid.
- PFOS: Perfluorooctanesulfonic acid.
Descriptions based on material in the EPA website
PFOA and PFOS are the most extensively produced and studied of these chemicals. Both are very persistent in the environment and in the human body, meaning they don't break down and can accumulate over time. There is evidence that exposure to PFAS can lead to adverse human health effects.
PFAS can be found in:
- Food packaged in PFAS-containing materials, processed with equipment that used PFAS, or grown in PFAS-contaminated soil or water.
- Commercial household products, including stain- and water-repellent fabrics, nonstick products (e.g., Teflon), polishes, waxes, paints, cleaning products, and firefighting foams (a major source of groundwater contamination at airports and military bases where firefighting training occurs).
- Workplaces, including production facilities or industries (e.g., chrome plating, electronics manufacturing, or oil recovery) that use PFAS.
- Drinking water, typically localized and associated with a specific facility (e.g., manufacturer, landfill, wastewater treatment plant, firefighter training facility).
- Living organisms, including fish, animals, and humans where PFAS have the ability to build up and persist over time.
This report does not constitute a rating action.
|Primary Credit Analyst:||Paul J Kurias, New York (1) 212-438-3486;|
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