CHICAGO--(BUSINESS WIRE)--Yesterday's ruling by a provincial appeals court in Ecuador upholding an $18 billion judgment against Chevron Corp. creates headline risk but is not expected to affect the company's credit profile, according to Fitch Ratings.
The judgment stems from a long-running civil court case in Ecuador in which plaintiffs allege environmental damages related to wastewater disposal in the Amazon Basin by a subsidiary of Texaco, which Chevron acquired in 2001.
Fitch continues to view the credit risk to bondholders stemming from a prospective settlement as low. Risks of a large near-term payout are mitigated by the potential for legal challenges to go on for years, as well as the fact that Chevron has no significant assets remaining in Ecuador.
By way of comparison, we note that the Exxon Valdez lawsuit was resolved only after a lengthy round of appeals 20 years after the 1989 Prince William Sound spill. In that case, the amount of punitive damages paid was approximately 20% of the original award.
Fitch also notes that Chevron had $20 billion of cash and time deposits as of the end of the third quarter, an amount in excess of the full judgement.
Chevron has vigorously contested the lawsuit on numerous grounds, and regards the rulings of the Ecuadorian courts in the matter as fraudulent. The company's opposition relates to a number of issues, including questions regarding the enforceability of the claim in light of a 1995 remediation agreement. Under that agreement, the company believes that Texaco and Petroecuador, its Ecuadorian partner, were released from liability by the government. Chevron also contests the retroactive assessment of claims under Ecuador's statute of limitations and is seeking recourse through legal proceedings outside of Ecuador.
Chevron's issuer default rating (IDR) is 'AA'. Its strong liquidity and cash flow generation profile provide substantial flexibility to absorb a large damage payment, in the event that the case is resolved more quickly than expected. As of Sept. 30, 2011, the company had free cash flow over the preceding 12 months of $9.2 billion and total reported balance sheet debt of approximately $9.5 billion, compared with assets of $204.1 billion.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.