Guest petard hoisting by David Middleton
There’s letters seal’d, and my two schoolfellows,
Whom I will trust as I will adders fang’d—
They bear the mandate, they must sweep my way
And marshal me to knavery. Let it work;
For ’tis the sport to have the enginer
Hoist with his own petard, an’t shall go hard
But I will delve one yard below their mines
And blow them at the moon.
OK… New York, California, Massachusetts, Vermont and other Peoples Republic entities have filed nuisance lawsuits and waged other forms of lawfare against ExxonMobil and other “Big Oil” companies. The general complaint is that “Big Oil” has caused climate change and all of the bad things that models predict will be caused by climate change.
They have also accused “Big Oil” of failing to disclose the risks that climate change and the regulation thereof may pose to their investors (i.e. mythical stranded assets). Well, I just read a very interesting article on Seeking Alpha which suggests that California may just be hoisting itself with their own petard… (blowing themselves up with their own mine).
Have California Munis Misled Investors And Bond Insurers About Climate Risk?
Jan. 9, 2018
Special situations, research analyst, banks, event-driven
Last summer, seven California cities and counties sued 17 oil and gas energy producers claiming that they have created a public nuisance and have caused climate change related damage that has increased sea levels in California and exposed the plaintiff governments to massive damages from natural disasters. Exxon Mobil (XOM) has now filed a petition, in District Court, to depose a number of people in the matter.
This is the latest in a series of lawsuits brought by California, Massachusetts, Vermont, and New York and a small number of other cooperating state and local governments against auto, utility, and energy-producing businesses.
Given the severity and specificity of the claimed harm and damages sought, it is peculiar that the disclosures in the plaintiff’s municipal and city bond issuance documents make very limited disclosures of any climate change risks. As a result, it appears these suits will either (A) create new economic risks and hazards for bond investors and, in the case of ‘wrapped’ deals, the bond insurers that wrap those California municipal debts or (B) provide the investors and bond insurers with the information with which to claim they have been defrauded by those municipalities.
Ironically, as a result of the subprime mortgage crisis, many of the same California counties that brought these latest environmental lawsuits filed suits against the five largest municipal bond insurers for “forcing” local governments to needlessly buy bond insurance in order to get higher credit ratings and issue debt with lower interest rates.
Have the tables turned?
The lawsuits against Chevron (CVX), Exxon Mobil, BP (BP), Shell Oil (RDS.A) (RDS.B) and over a dozen other firms now may provide the bond insurers and investors with a cause of action against the California plaintiffs in this case for failure to disclose, in bond deals, what it claims are massive environmental risks and damages to those counties and cities.
While the lawsuits claim significant harms to those cities and counties, those harms were not disclosed in the hundreds of bond issuances by those governments. In fact, while the plaintiffs in the suits claim grave and specific harms, their bond filings were largely silent on those risks and harms. As The Wall Street Journal highlighted in a headline today: “California Municipalities’ Debt Disclosures Contrast With Climate Warnings.” As a result, the issuers were almost certainly able to benefit from lower issuance costs that they would have been had they disclosed the risk to investors and, in the case of bonds that were wrapped by bond insurers, they likely paid lower insurance premiums than they would have had they fully disclosed the risks to the insurers.
As example, the City of Oakland claimed, in the lawsuits massive fossil-fuel production causes a gravely dangerous rate of global warming and ongoing and increasingly severe sea level rise harms to Oakland and that by 2050, a hundred year flood will occur every 2.3 years. These claims are in stark contrast to Oakland’s disclosures in its bond disclosures in this they state:
“The City is unable to predict when seismic events, fires or other natural events, such as sea rise or other impacts of climate change or flooding from a major storm, could occur, when they may occur, and, if any such events occur, whether they will have a material adverse effect on the business operations or financial condition of the City or the local economy.”
Similarly, San Francisco, another plaintiff, claims it is planning to fortify its Seawall in an effort to protect itself from rising sea levels and that the short-term costs of doing so will be more than $500 million with long-term upgrade costs of $5 billion. In San Francisco’s bond disclosures, it has stated:
“The City is unable to predict whether sea-level rise or other impacts of climate change or flooding from a major storm will occur, when they may occur, and if any such events occur, whether they will have a material adverse effect on the business operations or financial condition of the City and the local economy.”
Similar inconsistencies exist between the claimed harms and bond disclosures of Marin County, San Mateo County, the City of Imperial Beach, the County and City of Santa Cruz (the other plaintiffs in the lawsuits).
Basically… “Seven California cities and counties sued 17 oil and gas energy producers claiming that they have created a public nuisance and have caused climate change related damage that has increased sea levels in California and exposed the plaintiff governments to massive damages from natural disasters.”
The municipalities are certain enough that they have or imminently will suffer damages from anthropogenic climate change caused by Big Oil, that they have filed these massive nuisance lawsuits… But they were so uncertain about the risks from anthropogenic climate change, that they failed to disclose such risks in municipal bond offerings.