Corporate Finance. Global Refining And Marketing Rating Methodology. Rating Methodology. Moody s Global. Summary. December Table of Contents:

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Moody’s Global

Rating Methodology

Corporate Finance December 2009

Table of Contents: Summary About the Rated Universe About This Rating Methodology The Key Rating Factors Assumptions and Limitations and Rating Considerations That are not Covered in the Grid Conclusion: Summary of the Grid-Indicated Rating Outcomes Appendix A: Refining and Marketing Industry Methodology Factor Grid Appendix B: Methodology Grid-Indicated Ratings Appendix C: Observations and Outliers for Grid Mapping Appendix D: Refining and Marketing Industry Overview Appendix E: Key Rating Issues over the Intermediate Term Moody’s Related Research

1 2 4 6

12 14 15 16 18 23 23 24

Analyst Contacts: New York

1.212.553.1653

Kenneth Austin Vice President - Senior Credit Officer Steven Wood Senior Vice President Thomas S. Coleman Senior Vice President Andrew Oram Vice President - Senior Credit Officer Gretchen French Assistant Vice President - Analyst

Frankfurt

49.69.70730.700

Stanislas Duquesnoy Assistant Vice President - Analyst

Tokyo

Global Refining And Marketing Rating Methodology

81.3.5408.4026

Jun Sakurabayashi Analyst (Analyst Contacts continued on last page)

Summary This rating methodology explains Moody’s approach to assessing credit risk for companies in the refining and marketing industry. It replaces the Global Refining and Marketing Rating Methodology published in October 2005. With very similar core principles as the previous methodology, this updated framework incorporates some refinements and adjustments of the grid. This publication is intended to provide a reference tool that can be used when evaluating credit profiles within the refining and marketing industry, helping issuers, investors, and other interested market participants understand how key qualitative and quantitative risk characteristics are likely to affect rating outcomes. This methodology does not include an exhaustive treatment of all factors reflected in Moody’s ratings but should enable the reader to understand the key considerations and financial ratios Moody’s uses to derive ratings in this sector. This report includes a detailed rating grid and illustrative mapping of each rated company against the factors in the grid. The purpose of the rating grid is to provide a reference tool that can be used to approximate credit profiles within the refining and marketing sector. The grid provides summarized guidance for the factors that are generally most important in assigning ratings to refining companies. The grid is a summary that does not include every rating consideration, and our illustrative mapping uses historical results while our ratings also consider forward-looking expectations. As a result, the grid-indicated rating is not expected to match the actual rating of each company. The grid contains four key factors that are important in our assessments for ratings in the refining and marketing sector: 1.

Size and Scale

2.

Refinery Profitability

3.

Financial Flexibility

4.

Institutional Framework / Operating Environment

Moody’s Global Corporate Finance

Rating Methodology

Global Refining and Marketing Rating Methodology Each of these factors also encompasses a number of sub-factors or metrics, which we explain in detail. Since an issuer’s scoring on a particular grid factor often will not match its overall rating, in the Appendix we include a discussion of "outliers" – companies whose grid-indicated rating for a specific factor differs significantly from the actual rating. This rating methodology is not intended to be an exhaustive discussion of all factors that Moody’s analysts consider in ratings in this sector. We note that our analysis for ratings in this sector covers factors that are common across all industries (such as ownership, management, liquidity, legal structure in the corporate organization, and corporate governance) as well as factors that can be meaningful on a company specific basis. Our ratings consider qualitative considerations and factors that do not lend themselves to a transparent presentation in a grid format. The grid represents a compromise between greater complexity, which would result in grid-indicated ratings that map more closely to actual ratings, and simplicity, which enhances a transparent presentation of the factors that are most important for ratings in this sector most of the time. Because this methodology applies globally, it is necessarily general in some respects and is not intended to be an exhaustive and country-specific discussion of all factors that Moody’s analysts consider in every rating. Moody’s rating approach considers country-specific differences and at the same time allows for qualitative evaluation of these factors as well as other factors that cannot be easily presented in grid format. Highlights of this report include: 

An overview of the rated universe



A description of the key factors that drive rating quality



Comments on the rating methodology’s assumptions and limitations, including a discussion of rating considerations that are not included in the grid.

The Appendices show the rating grid criteria on one page (Appendix A), tables that illustrate the application of the methodology grid to 32 representative rated refining and marketing companies (Appendix B) with explanatory comments on some of the more significant differences between the grid-implied rating and our actual rating (Appendix C), a brief industry overview (Appendix D), and a discussion of key rating issues for the refining and marketing sector over the intermediate term (Appendix E).

About the Rated Universe Moody’s rates 32 companies in the refining and marketing industry. In the aggregate, these issuers have approximately $34 billion of rated debt. Refining and marketing companies are a diverse group that are made up of large and small independent companies, government owned/supported entities, and issuers that are owned by very large, highly rated sponsors. The global refining and marketing industry is fragmented, highly competitive - both regionally and worldwide – and extremely capital intensive. Both its revenues and costs are subject to global and regional commodity price forces, usually beyond any one issuer's control. 1

Worldwide, approximately 654 refineries with crude distillation capacity of over 85 million barrels per day , process a variety of crude oils and other feedstocks into petroleum products such as gasoline, diesel, heating oil and jet fuel. Some refining and marketing companies also have petrochemical operations with varying scale. Marketing involves the distribution of petroleum products through a variety of wholesale and retail (service stations) channels. Crude and refined products are international commodities that are traded freely on the open market, with major trading hubs located in the Netherlands, the U.S. Gulf Coast and Singapore. Refined product prices are determined by both regional and global supply/demand fundamentals. The industry is inherently cyclical, following global and regional patterns of economic growth and product demand, and industry patterns of investment, surplus and shortage. Among the defining trends, during periods of high refining margins, companies find it economical to add capacity. This will pressure margins when demand growth slows or

1

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Source: Oil and Gas Journal Refinery Survey January 1, 2009 December 2009  Rating Methodology  Moody’s Global Corporate Finance - Global Refining and Marketing Rating Methodology

Moody’s Global Corporate Finance

Rating Methodology

Global Refining and Marketing Rating Methodology declines. Conversely, when margins become severely depressed for a sustained period of time, it may then result in capacity being shut-down and permanently taken out of the market. Our rated refining and marketing issuers are located in over 10 countries/markets around the world. In the US, there are 16 rated refining and marketing companies that operate in very different markets within the US. The Corporate Family Rating (CFR) or senior unsecured ratings of the covered issuers range from A1 to B3 with a concentration in the Baa3 rating category. The median rating for refining and marketing companies falls between a Baa3 and a Ba1. As of the date of publication there were 21 issuers with a stable outlook, 5 issuers with a negative outlook, and 3 issuers with a positive outlook. There are also 2 ratings that are under review for possible downgrade and another that is under review for possible upgrade.

Exhibit 1

Global Refining and Marketing Rating Methodology Universe Name

Baseline Credit Rating Assessment

Outlook

Flint Hills Resources, LLC.

A1

Stable

Deer Park Refining LP

A2

Stable

493

Motiva Enterprises LLC

A2

Stable

1,435

Nippon Oil Corporation

A3

Empresa Nacional del Petroleo

A3*

Thai Oil Public Company Ltd

Baa1

Stable

350

GS Caltex Corporation

Baa2

Stable

2,085

PTT Aromatics and Refining

Baa2

Negative

300

Reliance Industries Limited

Baa2

Stable

931

S-OIL Corporation

Baa2

Stable

Sunoco, Inc.

Baa2

Negative

3,399

Valero Energy Corporation

Baa2

Stable

9,775

Cosmo Oil Company, Ltd.

Baa3

Stable

0

HOVENSA L.L.C.

Baa3

Stable

356

IRPC Public Company Limited

Baa3

Negative

Nippon Mining Holdings, Inc

Baa3

RUR↑

SK Energy Co Ltd

Baa3

Negative

Petroleum Co.of Trinidad & Tobago

Baa3*

14 (B1)

Stable

Indian Oil Corporation Ltd

Baa3*

11 (Ba1)

Stable

0

Tesoro Corporation

Ba1

Stable

3,479

Polski Koncern Naftowy Orlen S.A.

Ba1*

Frontier Oil Corporation

Ba2

Administracion Nacional de Combustibles-ANCAP

Ba2*

CITGO Petroleum Corporation

11-13 (Ba1-Ba3)

13 (Ba3)

258

RUR↓

0

Stable

740

Negative Stable

14 (B1)

$mm Total Rated Debt at 9/30/09

0

250 1510 550 1,600

0 350

Stable

0

Ba3

Stable

2,427

Holly Corp.

Ba3

Positive

Petroplus Holdings AG

Ba3

RUR↓

Alon USA Energy, Inc.

B2

Positive

675

Calumet Lubricants Co., L.P.

B2

Stable

381

CVR Energy Inc.

B2

Stable

611

Wynnewood Refining Company

B2

Stable

110

United Refining Company

B3

Stable

Western Refining, Inc.

B3

Positive

300 1,600

225 1,580

* Reflects Global Local Currency rating or Foreign Currency rating in cases where there is no Global Local Currency rating. Numerical ratings and ratings in parenthesis reflect baseline credit assessments per Moody’s Methodology for GovernmentRelated Issuers. For an explanation of baseline credit assessment please refer to Moody’s Special Comment entitled “The Application of Joint Default Analysis to Government-Related Issuers” (April 2005)

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December 2009  Rating Methodology  Moody’s Global Corporate Finance - Global Refining and Marketing Rating Methodology

Moody’s Global Corporate Finance

Rating Methodology

Global Refining and Marketing Rating Methodology Exhibit 2: Global Refining and Marketing Rating Distribution Ratings Distirbution 8

7

7

6

6 5

4

4

3

3 2

2

2

1

2

2

2

1

1

0

0 A1

A2

A3

Baa1 Baa2 Baa3

Ba1

Ba2

Ba3

B1

B2

B3

About This Rating Methodology This report explains the rating methodology for refining and marketing companies in six sections, which are summarized as follows:

1. Identification of Key Rating Factors The grid in this rating methodology focuses on four key rating factors. The four broad factors are further broken down into 8 sub-factors Factor SIZE AND SCALE

Factor Weighting 35%

Relevant Subfactor

Sub-Factor Weighting

Crude Distillation Capacity (mbbls/day)

15%

Complexity Bbls (mbbls)

10%

Number of Large-Scale Refineries

10%

REFINERY PROFITABILITY

15%

EBIT / Total throughputs barrels (3-year Average)

15%

FINANCIAL FLEXIBILITY

35%

Debt/Complexity Barrels ($/bbl)

10%

EBIT (3-year Average) / Interest Expense

15%

RCF (3-year Average) /Debt

10%

Institutional Framework / Operating Environment

15%

INSTITUTIONAL FRAMEWORK / OPERATING ENVIRONMENT

15%

2. Measurement of the Key Rating Factors We explain below how the sub-factors for each factor are calculated and the weighting for each individual subfactor. We also explain the rationale for using specific rating metrics, and the ways in which we apply them during the rating process. Much of the information used in assessing performance for the sub-factors is found in or calculated using the company’s financial statements; others are derived from observations or estimates by Moody’s analysts. Moody’s ratings are forward-looking and incorporate our expectations of future financial and operating performance. We use both historical and projected financial results in the rating process. Historical results help us to understand patterns and trends for a company’s performance as well as for peer comparison. While the rating process includes both historical and anticipated results, this document makes use of historical data only

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December 2009  Rating Methodology  Moody’s Global Corporate Finance - Global Refining and Marketing Rating Methodology

Moody’s Global Corporate Finance

Rating Methodology

Global Refining and Marketing Rating Methodology to illustrate the application of the rating methodology. Specifically, unless otherwise stated, the mapping examples use reported financials for the three-year period ended December 31, 2008. All of the quantitative credit metrics incorporate Moody’s standard adjustments to income statement, cash flow statement and balance sheet amounts for (among others) off-balance sheet accounts, receivable securitization programs, under-funded pension obligations, and recurring operating leases.

3. Mapping Factors to the Rating Categories After identifying the measurements for each factor, the potential outcomes for each of the 8 sub-factors are mapped to a broad Moody’s rating category. (Aaa, Aa, A, Baa, Ba, B, Caa).

4. Mapping Issuers to the Grid and Discussion of Grid Outliers In this section (Appendix C) we provide tables showing how each company maps to grid-indicated ratings for each rating sub-factor and factor. The weighted average of the sub-factor ratings produces a grid-indicated rating for each factor. We highlight companies whose grid-indicated performance on a specific sub-factor is two or more broad rating categories higher or lower than its actual rating and discuss general reasons for such positive outliers and negative outliers for a particular factor or sub-factor.

5. Assumptions and Limitations and Rating Considerations Not Included in the Grid This section discusses limitations in the use of the grid to map against actual ratings, additional factors that are not included in the grid that can be important in determining ratings, and limitations and key assumptions that pertain to the overall rating methodology.

6. Determining the Overall Grid-Indicated Rating To determine the overall rating, we convert each of the 12 sub-factor ratings into a numeric value based upon the scale below. Aaa

Aa

A

Baa

Ba

B

Caa

1

3

6

9

12

15

18

The numerical score for each sub-factor is multiplied by the weight for that sub-factor with the results then summed to produce a composite weighted factor score. The composite weighted factor score is then mapped back to an alphanumeric rating based on the ranges in the grid below.

Grid-Indicated Rating

5

Aggregate Weighted Total Factor Score

Aaa

x < 1.5

Aa1 Aa2 Aa3

1.5 ≤ x < 2.5 2.5 ≤ x < 3.5 3.5 ≤ x < 4.5

A1 A2 A3

4.5 ≤ x < 5.5 5.5 ≤ x < 6.5 6.5 ≤ x < 7.5

Baa1 Baa2 Baa3

7.5 ≤ x < 8.5 8.5 ≤ x < 9.5 9.5 ≤ x < 10.5

Ba1 Ba2 Ba3

10.5 ≤ x < 11.5 11.5 ≤ x < 12.5 12.5 ≤ x < 13.5

B1 B2 B3

13.5 ≤ x < 14.5 14.5 ≤ x < 15.5 15.5 ≤ x < 16.5

December 2009  Rating Methodology  Moody’s Global Corporate Finance - Global Refining and Marketing Rating Methodology

Moody’s Global Corporate Finance

Rating Methodology

Global Refining and Marketing Rating Methodology Grid-Indicated Rating

Aggregate Weighted Total Factor Score

Caa1 Caa2

16.5 ≤ x < 17.5 17.5 ≤ x < 18.5

For example, an issuer with a composite weighted factor score of 11.7 would have a Ba2 grid-indicated rating. We used a similar procedure to derive the grid-indicating ratings in the tables embedded in the discussion of each of the four broad rating factors.

The Key Rating Factors Moody’s analysis of refining and marketing companies focuses on four broad factors: 

Size and Scale



Refinery Profitability



Financial Flexibility



Institutional Framework / Operating Environment

Factor 1: Size and Scale (35% weight) Why It Matters Size per se is not a virtue or a guarantee of acceptable returns in an industry that is susceptible to excess capacity. However, refining is a volume-driven business with a large-fixed cost component that benefits from economies of scale. A company with significant capacity is also generally in a better position than a small refiner to negotiate discounts on crude and other feedstock supplies. It is also more likely to have logistics assets such as pipelines and terminals that can provide more efficient market access. Such companies will also likely benefit from higher margins attributable to lower reliance on third-party distribution channels. These companies are also better positioned to withstand unexpected downtime that is inherent in this business. Owning only one refinery exposes the company to having its cash flows shut off if that refinery were to go down due to a natural disaster (floods, hurricanes) or accidents like fires or leaks in certain processing units. Finally, in addition to the benefits of influence and economies of scale, size also tends to facilitate access to the capital markets through various points in the cycle, not just when times are good. Diversification in terms of crude supplies, product mix and geography are important to the stability of a refining company's earnings and cash flow. We consider whether a refiner's crude sources are sufficiently diversified, so that it is not forced to shut down its operations if one source becomes unavailable or faces a significant, near-term decline. A diversified product mix reduces reliance on a single product and usually implies a more valuable product yield. A geographically diverse spread of refining and marketing assets can have a positive portfolio benefit for refiner’s credit ratings. Exposure to seasonality, different margin characteristics, and other factors varies from market to market and across national boundaries. We do not measure these aspects of diversification because refiners do not disclose information on their crude sources and product mixes on a consistent basis, mainly for competitive reasons, and because geographic diversification can be national or regional. However, our measurements of scale typically capture these attributes, as companies with substantial refining capacity and several large-scale refineries usually exhibit a high degree of operational and geographic diversification. For example, having multiple refineries or a large scale refinery offers a higher degree of optionality for refiners to adjust their crude sources, throughput volumes, or its product slate to adapt to changing margins.

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December 2009  Rating Methodology  Moody’s Global Corporate Finance - Global Refining and Marketing Rating Methodology

Moody’s Global Corporate Finance

Rating Methodology

Global Refining and Marketing Rating Methodology How We Measure it for the Grid

Crude Distillation Capacity This metric captures a refiner’s total crude processing capacity on a daily basis without regard to the types of crude oil it runs or the type of products that are produced.

Complexity Barrels This metric recognizes not only a company’s throughput capacity, but also signals the quality of that capacity 2

3

by its Nelson Complexity Barrels . A company with a high weighted average Nelson Complexity Factor is able to process cheaper, heavy sour crude oils that are more difficult to refine, yet still yield a high proportion of valuable light transportation fuels, specialty lubricants, or petrochemicals. A high Nelson Complexity Factor for a refinery indicates a high level of capital investment in sophisticated process units, a higher cash margin potential per barrel of throughput (offsetting higher unit operating costs) and greater refinery asset value per unit of distillation capacity.

Number of Large Scale Refineries We define large-scale refineries as those having more than 100,000 barrels per day of crude distillation capacity. A large-scale refinery can benefit from economies of scale to reduce unit costs and is more likely than a smaller unit to be the efficient survivor during a period of low refining margins. Large scale refineries also typically have more options and greater flexibility in terms of expansions and/or upgrades that could benefit credit quality. We also consider the number of redundant process trains in a refinery, as multiple trains in large-scale refineries provide redundancies that can help mitigate the effects of unplanned downtime. For example, we consider a refinery with 500,000 barrels per day of crude distillation capacity and two full process trains as equivalent to two large-scale refineries.

Factor 1

Size and Scale (35%) Weight

Aaa

Crude Distillation Capacity (mbbls/day)

15%

≥3,000

2,000 - 3,000 1,000 - 2,000

Aa

Complexity Bbls

10%

≥9,000

7,500 - 9,000 5,000 - 7,500 3,500 - 5,000 2,000 - 3,500 500 - 2,000

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