1、Global ResearchDecember 2019PFAS Investor Guide How material could PFAS be for industrials?Markus MittermaierAnalystHead of Americas Electrical Engineering & Multi Industry UBS Investment Bank | Global Investment Research HYPERLINK mailto:markus.mittermaier markus.mittermaierThis report has been pre

2、pared by UBS Securities LLC.ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON SLIDE 18UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this

3、 report. Investors should consider this report as only a single factor in making their investment decision.What are Perfluoroalkyl & Polyfluoroalkyl Substances (PFAS)?What are Perfluoroalkyl and Polyfluoroalkyl Substances (PFAS)?A family of synthetic chemicals that have been used in industry since t

4、he 1950s to make products that resist oil, grease, stain and water.Main Properties of PFAS substances:Carbon chain surrounded by fluorine atoms and acid groupRepel/resists grease, water and oilPersistent, bio-accumulative (i.e. very stable over time)Widespread industrial & consumer products applicat

5、ions:Non-stick cookware (non stick properties)Carpet and clothing treatments (to prevent staining; make items water resistant)Mattresses (waterproofing)Paper and cardboard packaging: candy wrappers, pizza boxes, fast foodcontainers, microwave popcorn bags, some grease-resistant paper,Aqueous Film Fo

6、rming Foam (AFFF) fire-fighting foamAerospace/Auto/Buildings/Electronics etc. due to friction reducing propertiesPersonal care products (shampoo, dental floss), cosmetics (nail polish,)Paints, varnishes, and sealantsWhy are we talking about this?Potential health concerns triggering litigation and se

7、ttlements regarding e.g. environmental cleanup, health monitoring and bodily injury compensationLitigation seems to be around three themes:Claims related to PFAS manufacturers plants (e.g. 3M)Claims related to customers plantsClaims related to AFFF Fire Fighting FoamCompanies in our coverage have be

8、en involved in settlements and/or have PFAS related liabilities/provisions3M: $850M settlement with the State of Minnesota resolving a natural resource damage (NRD) lawsuit; additionally, recorded $241M of environmental liabilitiesJCI: A defendant in an increasing number of lawsuits.Over next 12 mon

9、ths we expect to gain some clarity on a MDL in South Carolina.3M recently entered settlements and recorded liabilities of$897M and $241M, respectively how much more is there?Under the terms of the settlement, 3M agreed to provide an $850 million grant to the State for a special “3M Water Quality and

10、 Sustainability Fund.” This Fund will enable projects that support water sustainability in the Twin Cities East Metro region, such as continued delivery of water to residents and enhancing groundwater recharge to support sustainable growth.The projects will also result in habitat and recreation impr

11、ovements, such as fishing piers, trails, and open space preservation. 3M recorded a pre-tax charge of $897 million, inclusive of legal fees and other related obligations, in the first quarter of 2018 associated with the resolution of this matter.(from MMM 10Q Sep 30, 2019)Filtration helps:Cash impac

12、t over 20 yearsSome insurance recoveriesTwo key research questions to understand how big a problem this could become1Do we have any evidence on past outcomes that could helpestimate future liabilities?2How widespread is this problem?Two key research questions1Do we have any evidence on past outcomes

13、 that could help estimate future liabilities?DuPont settlement on a West Virginia Case (2004)Various recent settlements across the US pertaining to environmental cleanup2How widespread is this problem?We used Evidence Lab to figure this outWe estimate that the liability likely scales with the number

14、affected people1How widespread is this problem?We used UBS Evidence Lab to estimate the number of individuals living within a 1, 2, or 5 mile radius of a known PFAS site or potentially contaminated sites. These sites include civilian airports, landfills, military airports, and specific industrial si

15、tes.UBS Evidence Lab utilized data from various sources: US EPA for Drinking Water Contamination Sites, US Air Force Administration Record for Military Sites, State of Michigan PFAS Sites, State of Michigan, State of Minnesota and State of California.Once the sites are determined there are two metho

16、dologies used to count the surrounding population:Centroid this method looks at the radius surrounding a site and counts the population centers (centroids) that fall within the radius. Demographics are determined either at the zip code or block group level. Block groups are generally smaller than zi

17、p codes, and therefore lead to a more conservative estimate. In the graphic to the right the blue star represents a PFAS site and black dots represent population centers.Intersection this method is similar to the centroid method in that a radius is drawn around a PFAS site, however instead of adding

18、 centroids it aggregates all zip codes or block groups that intersect the circle, which generally leads to a larger estimate.In summary, the combination of zip code level data and the intersection counting method will yield the largest population estimates, while block group level data and the centr

19、oid method will be more conservative.1Find sites with known PFAS contamination and show this for various levels on a parts per trillion basis1Site were also found with potential contamination and added the geolocations for these (as of November 2019)1Then overlay these sites with population density

20、data to calculate the number of potentially affected people1We find that a significant number of people live within 5 miles of known PFAS sites as well as potential risk locationsPopulation within 5 miles of known PFAS sites and potential risk locations: 55MKnown PFAS sites13M in 5 mile radiusKnown

21、PFAS sites500ppt6.2M in 5 mile radiusHigh risk areas for AFFF (fire fighting foam) contaminationPopulation within 5 miles of military airport locations: 26M in 5 mile radiusKnown overlap 1.6M10Source: UBS Evidence Lab, Expert discussions, UBS estimates and analysis. Data shown using average between

22、two population counting methodologies (Centroid & Block Group method vs Intersect & Zip Code method)1What can we take away from these data points? Early thoughts on the dataThe data shows that millions of people in the US might be living in areas with PFAS contamination13 million live within 5 miles

23、 of known sites with PFAS contamination, which seems a critical radius in terms of drinking water contamination (prior settlements)Of these, 6.2 million live in areas with contamination levels of 500ppt (parts per trillion) or more, which was an important threshold for compensation in the DuPont vs.

24、 Leach case, according to experts we have spoken with (500ppt exposure for more than 1 year led to eligibility)Importantly, 26 million people live within 5miles of military airports, where experts expect among the highest contamination levels due to the frequent use of AFFF Fire Fighting Foam (e.g.

25、in regular fire fighting training, which leaked PFAS chemicals into the environment)This remains one of the key areas of further data gathering for UBS Evidence Lab and UBS researchWe have a precedent for PFAS financial outcomes based on a population of 80,000 people (DuPont vs. Leach) as well as in

26、itial settlements on environmental clean-upBased on prior legal precedent there appear to be2three categories of financial risksEnvironmental clean-up costsMedical monitoring costsMedical / Bodily Injury compensation costs2Past outcomes across three cost categoriesThrough our conversations with lega

27、l/environmental experts as well as reviewing prior PFAS settlements, we derive estimates for the costs that could result from PFAS1A.Environmental clean-up costs:We looked at the PFAS environmental clean-up costs (settled or projected) in 7 known cases (basedon expert discussions). The average cost

28、per person we calculate to be $1,560.PFAS Environmental Cleanup Costs: settled cases, remediation paid for, or projectedLocationPopulationCostCost / PersonBarnstable, MA45,000$3,000,000$67Westfield, MA42,000$13,000,000$310Hoosick Falls, NY3,500$10,000,000$2,857Decatur, AL53,000$39,000,000$736Petersb

29、urg, NY1,500$1,200,000$800New York State4,485,000$2,197,650,000$490Minnesota150,000$850,000,000$5,667Average$1,561Median$736Notes: 1) New York State: (projected) cost to clean up to 10ppt for PFOA and PFAS of $855M plus $45M per year to maintain. This is 23% of the water districts in NYS.Population

30、of NY State affected: 19.5M x .23 = 4,485,000. Initial costs $190 per person plus $10 per person per year to maintain at 30 years that is approximately $490 per person.2) Minnesota - $850M settlement 150,000k people living in plume around plant that is $5,666 per person although actually lower since

31、 settlement is statewide - i.e., more than area around the plant2Past outcomes across three cost categoriesB2)Medical monitoring costs: $3k/personIn the case of DuPont vs. Leach (settled in 2004), $235mio was spent for medical monitoring of 70,000 of the 80,000 people living in the affected area.Thi

32、s is equivalent to approximately $3,000 per personC3)Compensation for illness/bodily injury: $190k/personAgain we look to the DuPont case, where of the 70,000 people undergoing regular health monitoring, 3,500 people met the criteria of a science advisory panel for compensation (i.e. got sick with i

33、llnesses deemed to have a probable link to PFAS)DuPont decided to settle (after several trials) for $671Mio for 3,500 peopleThis is equivalent to $190k/personIn our sensitivity analysis, we assume in our base case that approximately 4% of an affected population would be eligible for compensation (in

34、 line with 3,500 out of 80,000 people affected in the referenced case). Of course this can vary case by case.To bring all these estimates together it is critical to determine the number of people who could be exposed to PFAS. We use the work of UBS Evidence Lab to come up with a range of estimates f

35、or the population in areas surrounding known PFAS sites and potential risk sites2Depending on the ultimate number of affected people, we provide sensitivity tables for potential outcomesCLEAN-UP COSTS ($M)# of people affected2 million6 million9 million12 million15 million19 million23 million27 milli

36、on30 millionClean-up cost / person$200$460$1,110$1,760$2,410$3,060$3,810$4,560$5,310$6,060$400$920$2,220$3,520$4,820$6,120$7,620$9,120$10,620$12,120$600$1,380$3,330$5,280$7,230$9,180$11,430$13,680$15,930$18,180$800$1,840$4,440$7,040$9,640$12,240$15,240$18,240$21,240$24,240$1,000$2,300$5,550$8,800$12

37、,050$15,300$19,050$22,800$26,550$30,300$1,200$2,760$6,660$10,560$14,460$18,360$22,860$27,360$31,860$36,360$1,400$3,220$7,770$12,320$16,870$21,420$26,670$31,920$37,170$42,420$1,600$3,680$8,880$14,080$19,280$24,480$30,480$36,480$42,480$48,480$1,800$4,140$9,990$15,840$21,690$27,540$34,290$41,040$47,790

38、$54,540MEDICAL MONITORING COSTS ($M)# of people affected2 million6 million9 million12 million15 million19 million23 million27 million30 millionMonitoring cost / person$1,400$3,220$7,770$12,320$16,870$21,420$26,670$31,920$37,170$42,420$1,800$4,140$9,990$15,840$21,690$27,540$34,290$41,040$47,790$54,54

39、0$2,200$5,060$12,210$19,360$26,510$33,660$41,910$50,160$58,410$66,660$2,600$5,980$14,430$22,880$31,330$39,780$49,530$59,280$69,030$78,780$3,000$6,900$16,650$26,400$36,150$45,900$57,150$68,400$79,650$90,900$3,400$7,820$18,870$29,920$40,970$52,020$64,770$77,520$90,270$103,020$3,800$8,740$21,090$33,440

40、$45,790$58,140$72,390$86,640$100,890$115,140$4,200$9,660$23,310$36,960$50,610$64,260$80,010$95,760$111,510$127,260$4,600$10,580$25,530$40,480$55,430$70,380$87,630$104,880$122,130$139,38015Source: UBS Evidence Lab, UBS estimates and analysis2Depending on the ultimate number of affected people, we pro

41、vide sensitivity tables for potential outcomes, contd.MEDICAL COMPENSATION* ($M)# of people affected2 million6 million9 million12 million15 million19 million23 million27 million30 millionCompensation / person$90,000$8,280$19,980$31,680$43,380$55,080$68,580$82,080$95,580$109,080$115,000$10,580$25,530

42、$40,480$55,430$70,380$87,630$104,880$122,130$139,380$140,000$12,880$31,080$49,280$67,480$85,680$106,680$127,680$148,680$169,680$165,000$15,180$36,630$58,080$79,530$100,980$125,730$150,480$175,230$199,980$190,000$17,480$42,180$66,880$91,580$116,280$144,780$173,280$201,780$230,280$215,000$19,780$47,73

43、0$75,680$103,630$131,580$163,830$196,080$228,330$260,580$240,000$22,080$53,280$84,480$115,680$146,880$182,880$218,880$254,880$290,880$265,000$24,380$58,830$93,280$127,730$162,180$201,930$241,680$281,430$321,180$290,000$26,680$64,380$102,080$139,780$177,480$220,980$264,480$307,980$351,480TOTAL COST (

44、$M)*# of people affected2 million6 million9 million12 million15 million19 million23 million27 million30 millionCompensation / person$90,000$17,480$42,180$66,880$91,580$116,280$144,780$173,280$201,780$230,280$115,000$19,780$47,730$75,680$103,630$131,580$163,830$196,080$228,330$260,580$140,000$22,080$

45、53,280$84,480$115,680$146,880$182,880$218,880$254,880$290,880$165,000$24,380$58,830$93,280$127,730$162,180$201,930$241,680$281,430$321,180$190,000$26,680$64,380$102,080$139,780$177,480$220,980$264,480$307,980$351,480$215,000$28,980$69,930$110,880$151,830$192,780$240,030$287,280$334,530$381,780$240,0

46、00$31,280$75,480$119,680$163,880$208,080$259,080$310,080$361,080$412,080$265,000$33,580$81,030$128,480$175,930$223,380$278,130$332,880$387,630$442,380$290,000$35,880$86,580$137,280$187,980$238,680$297,180$355,680$414,180$472,680Takeaways:Outcomes could be material for companies being drawn into thes

47、e liabilities in a worst case scenario although the impact would be over many years given that litigation is likely going to play out over 5+ years.Depending on assumptions, actual outcomes might vary considerably, or may even be relatively small / immaterial for some / all companies (e.g. if milita

48、ry contractor defense applies)Source: UBS Evidence Lab, Expert discussions, UBS16* - assumes 4% of the exposed population qualify for medical compensation.;* - assumes $1,000 per person for clean-up, $3,000 per person for medical monitoring, and that 4% of the exposed pop. qualify for medical compen

49、sation.Valuation Method and Risk StatementRisk Statement: The Electrical Equipment and Multi Industry sector faces a broad range of risks. It is cyclical in nature with exposure to the underlying cycles inherent in everything from aviation, auto, trucking and trains to construction and consumer elec

50、tronics to mining, power, oil and gas and more depending on the specific stock. EEMI companies are subject to risks associated with unexpected changes in the underlying global macro environment, currency and interest rate movements, commodity price inflation as well as company-specific execution, M&

51、A, integration, labor relations and changes in the competitive or regulatory environment. These changes can be in the form of product technology, e-commerce and other digital disruption and/or channel disintermediation. Capacity and related pricing pressures are also a risk through the cycle. Finall

52、y, these multinational companies are subject to policy changes taking place in the United States and internationally, including those related to environmental regulation and tariffs.Concerns around the potential health effects of PFAS have resulted in litigation and settlements regarding e.g. enviro

53、nmental cleanup, health monitoring and bodily injury compensation. Companies in our coverage have been involved in settlements and/or have PFAS related liabilities/provisions. Additional liabilities related to environmental cleanup, health monitoring, or bodily injury compensation pose a potential r

54、isk to investors in companies involved.Sustainable Investing is an active approach to investment decision-making that takes relevant environmental, social and governance (ESG) issues into account. UBSs ESG research team believes that ESG issues are inevitably embedded in any firms business model, an

55、d are therefore no different than the many other issues taken into consideration in investment research.Required DisclosuresThis report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and affiliates are referred to herein as UBS.For information on

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58、ct as principal in the debt securities (or in related derivatives) that may be the subject of this report. This recommendation was finalized on: 11 December 2019, 7:00PM GMT. UBS has designated certain Research department members as Derivatives Research Analysts where those department members publis

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