After yesterday's announcement of a tentative settlement between BP and federal and state negotiators, BP has provided details of the payment schedule for the $18.7B settlement. The settlement consists of payments for civil penalties ($5.5B), natural resource damages ($7.33B), and state damages ($4.9B) over 18 years. An additional $1B is set aside for payments to over 400 local entities bringing the total to the reported $18.7B.
| Year after consent decree | Civil Penalty payments | Natural Resource Damages (NRD) payments | NRD additional final payment | State Claims payments |
|---|---|---|---|---|
| 0 | $1,000,000,000 | |||
| 1 | $379,310,345 | $489,655,172 | ||
| 2 | $189,655,712 | $244,827,586 | ||
| 3 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 4 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 5 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 6 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 7 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 8 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 9 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 10 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 11 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 12 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 13 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 14 | $379,310,345 | $489,655,172 | $260,000,000 | |
| 15 | $379,310,343 | $489,655,172 | $260,000,000 | |
| 16 | $232,000,000 | $260,000,000 | ||
| 17 | $260,000,000 | |||
| Totals | $5.50 billion | $7.10 billion | $0.23 billion | $4.90 billion |
When performing benefit-cost analysis, a dollar today is not worth the same as a dollar tomorrow. Spreading the payments over 18 years means that BP will be laying out less than $18.7B out of pocket. How much less depends on the interest (discount) rate assumed for calculations.
Using the payment schedule above, and standard present value calculations, the present value of BP's $18.7B is between $11.7B* (at a 7% discount rate) and $15.0B (at a 3% discount rate)**. In other words, if BP were making a cash payment today, they would be on the hook for significantly less than the reported $18.7B.
I'm not making a judgment. Just pointing out the math. I will leave it to others to make the judgment.
UPDATE: Hmmm…I just realized this note at the bottom of BP's press release might render the present value calculations moot:
"Interest will accrue at a fixed rate on the unpaid balance of the civil penalty and natural resource damges payments, compounded annually and payable in years 15 (CWA) and 16 (NRD).
The interest rate will be fixed at the average market yield on U.S. Treasury securities at 2-year and 3-year constant maturities, quoted on an investment basis by the US Federal Reserve (H.15 Release), for the period from 28 May 2014 to 27 May 2015."
If I am reading that right, that means BP will effectively borrow against future payments which offsets the savings that would occur from delaying payments,
*I've assumed the $1B payment to local entities is being made immediately. Not a realistic assumption but without more information, we can't predict when these payments will be made. Delaying or spreading these payments over time would reduce the present value of the outlay further.
**And just for reference, BP's profits in Q1 of 2015 were $2.6B.
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