Global Chemical Industry

Rating Methodology February 2006 Contact Phone Jersey City Mark Gray John Rogers 1.201.915.8300 New York Bill Reed Dan Marx 1.212.553.1653 Lon...
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Rating Methodology February 2006 Contact

Phone

Jersey City

Mark Gray John Rogers

1.201.915.8300

New York

Bill Reed Dan Marx

1.212.553.1653

London

Francois Lauras Elena Nadtotchi Ruchi Gupta

44.20.7772.5397

Frankfurt

Michael West Oliver Giani

49.69.707.30.700

Tokyo

Takahiro Morita Noriko Kosaka

81.3.5408.4100

Hong Kong

Helen Li

852.2916.1121

Global Chemical Industry

Summary This rating methodology identifies the key rating considerations and financial ratios that drive Moody's ratings of chemical companies in the global chemical industry. The primary goals of this report are to help issuers, investors and other participants in the industry understand how Moody's assesses risk in chemical companies, and to enable our constituents to be able to gauge a company's ratings within two notches. To this end, we present explanations of the rating factors we deem critical as well as the metrics by which we assess them. We also discuss "outliers" - companies whose performance on a specific metric is higher or lower than their final ratings might otherwise indicate. The key factors by which we assess credit risk in chemical companies worldwide are: 1. Business Profile 2. Size and Stability 3. Cost Position 4. Management Strategy 5. Financial Strength In addition to these factors, we examine others — including corporate governance, management effectiveness, position within discrete industry cycles and shareholder structure. However, because these factors are generic to most corporate issuers we do not cover them in great detail in this report. Readers should note that this methodology is not an exhaustive treatment of every factor considered in Moody's ratings of chemical companies, but it should enable our constituents to understand how and why we arrive at a final rating.

About the Rated Universe Moody's rates 111 companies globally in the chemicals and allied industries. These companies develop and produce a wide variety of products including basic chemicals, specialty materials, and industrial gases. Products range from true commodities to highly customized products used in technically demanding applications. The rated universe is spread throughout the world with the highest concentrations in the Americas, Europe and Japan. Companies range in size from as large as $40 billion in revenues to as small as $150 million. Some may be multinational with numerous manufacturing locations around the globe, while others may operate a single facility with domestic customers only. The highly volatile nature of the industry as well as fairly high levels of business risk make it increasingly difficult for all but a select few companies who are extremely large and diversified to achieve and maintain a Aa rating. Ratings of A or above are generally limited to larger companies or to smaller specialty companies that exhibit uncommon stability in financial performance and relatively low business risk. The vast majority of companies, approximately 75%, are in the Baa, Ba, and B range because of the cyclical nature of the industry and moderate to high business risk.

Rating Distribution g 25 20 Number of Issuers

20 15 15 11 10

8

8

8

10 7

7

8 4

5 1

1

Aa3

A1

2 0

1

0 A2

A3

Baa1 Baa2 Baa3

Ba1

Ba2

Ba3

B1

B2

B3

Caa1 Caa2 Caa3

Ratings

In Europe and, to a lesser degree in the US, a growing number of speculative grade names have been added to the rated universe. This is attributable in part to incumbents' recent strategic efforts to focus on their core businesses as well as to a growing interest from private equity sponsors. For the purpose of this methodology we have identified 18 representative issuers out of the companies that we rate globally. These issuers represent both investment grade and speculative grade issuers. The criteria used to select the 18 focused on the larger (in terms of revenues), well-known issuers. For this reason the proportion of investment grade to non-investment grade issuers represented is higher than it is in the rated universe.

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Moody’s Rating Methodology

Representative Global Chemical Companies Chemical Methodology Issuer List As of February 2006 Issuer 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

BASF AG Shin-Etsu Chemical Co., Ltd. E.I. DuPont BOC Group plc Dow Chemical Praxair Rohm & Haas Sumitomo Chemical Co., Ltd. Monsanto Potash of Saskatchewan Eastman Chemical Yara Intl PTT Chemical* Nova Basell AF Huntsman Lyondell Chemical PolyOne Corp

Senior Unsecured Rating or Corporate Family Rating

Short term Rating

Aa3 A1 A2 A2 A3 A3 A3 A3 Baa1 Baa1 Baa2 Baa2 Baa3 Ba2 Ba3 B1 B1 B2

P1

Outlooks Stable Positive Negative Stable Negative Stable Stable Stable Stable Stable Stable Stable Stable Negative Stable Developing Positive Positive

P1 P1 P2 P2 P2 P2 P2

Country Germany Japan United States United Kingdom United States United States United States Japan United States Canada United States Norway Thailand Canada Netherlands United States United States United States

*PTT Chemical is the surviving entity of the merger between Thai Olefins Public Co. Ltd. and National Petroleum Public Co. Ltd.

Industry Overview and Current Risk Characteristics Chemical companies are, in general, characterized by diversity, risk and cyclicality:

UNUSUALLY HIGH DIVERSITY IS A HALLMARK OF THE SECTOR Chemical company issuers make up an extraordinarily diverse portfolio of firms with a wide variety of business risks and potentially volatile financial returns. Business risks vary significantly depending on the products sold and markets served. Overall, the diversity of the sector plays out in the following ways: • Raw Material Inputs: There are a surprisingly diverse number of raw material inputs. Raw materials typically represent the largest component of operating expenses. Further, because many of the raw materials used by chemical companies are petroleum based, many companies have significant exposure to the price of crude oil and/or natural gas. • Business and Economic Cycles: Companies are subject to diverse business and economic cycles that will have a direct affect on credit quality. While the global industrial economy is important for most, many companies have end-markets that typically do well in the early stages of economic recovery while others do well in the late stages of economic recovery. Regional economic cycles can also vary significantly; and in the case of global commodities, swings in one region can affect other geographic markets dramatically. For some commodity chemical companies, tariffs have been declining, making the industry more of a "true" global market. • Business Portfolios: Considerable portfolio realignment has occurred over the past decade in Europe, and to a lesser extent, in the Americas. Despite this activity, several of the European sector's incumbents have retained hybrid business profiles that encompass sizeable healthcare/pharmaceutical activities, which have different dynamics and risk drivers1. • Capital Spending Cycles: Chemical companies can, as function of unique and varied product portfolios, generate material amounts of cash when product prices are sustained at peak levels over many quarters. These large cash pools are available for capital spending programs and are often designated for large capacity increases and greenfield projects. Most chemical companies typically spend less than depreciation on capital spending. However over long periods of time the capital intensity of these companies requires that appropriate cash be spent to properly maintain plant and equipment. When they add new capacity they can spend substantially more than depreciation. 1.

Please see Moody's Rating Methodology: Global Pharmaceutical Industry, Michael Levesque, November 2004

Moody’s Rating Methodology

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Companies with similar product lines are subject to peak market conditions and thus generate these large cash pools at the same time. In such cases, competitors with similar cash pools may initiate capacity expansion projects that will be completed at essentially the same time and thus add materially to global capacity. These "bunched" capacity additions can be very disruptive to the products' supply demand balance and often result in substantial product price declines. • Capital Formation Cycles: Companies also undergo diverse capital formation cycles as a function of their ownership models. Public companies are typically looking at a combination of longer term growth strategies and optimization of existing businesses. Companies owned by financial owners are subject to unique demand for excess returns to investors in the short to intermediate term. Thus, their focus is often on effective rationalization and increased productivity to realize materially improved cash flows. There are also private companies who take a longer term view in a more leveraged environment and are driven either by debt financed growth or long term REIT-like value propositions.

KEY INDUSTRY RISKS: LOOKING INTO THE NEXT DECADE Chemical company issuers may be both helped and hurt by the diversity of the industry. The diverse nature of a company's product portfolio may help mitigate the risk that accrues from volatile prices and demand in specific products. Some of the key risk characteristics that define this sector include: • Risk of Margin Pressure: As many of the raw materials used by chemical companies are petroleum based, many companies have significant direct and indirect exposure to the price of crude oil/natural gas. Upsurges in crude oil and natural gas prices for companies are a negative not only in that they can increase operating expense, but also because there may be material delays passing these higher costs through to the customer. These delays can affect cash flows dramatically. • Supply Demand Imbalances are Common: Capital spending cycles can also create negative pressures, particularly when competing companies are flush with cash at the same time. As companies with similar cash rich product portfolios choose to spend at the same time to add capacity credit profiles can be negatively impacted. Capacity, greenfield or brownfield, typically comes on-stream in large increments. These bunched capacity additions can disrupt supply dynamics and lower product prices for considerable periods of time until the new capacity is absorbed by slower growing demand. • Impact of Government Policies: Government policies can affect the industry in three ways. The first is the introduction of large increments of new supply as oil and natural gas rich nations seek to develop what are, in some instances, "stranded" (very low cost) raw materials into higher margin chemical products. This can create supply/demand imbalances similar to those discussed above. The second is the willingness of governments to implement policies that either directly finance or indirectly support non-economic production capacity (i.e., India's support of the fertilizer industry). The third is the establishment of environmental regulation or remediation, which may be extremely costly to companies in certain instances. While historic gaps in regulation requirements in different geographies have narrowed, real disparities still exist — particularly between developed economies and less developed areas of the world • Debt Financed Industry Consolidation: This type of growth (as opposed to the new capacity driven growth mentioned above) avoids the supply imbalances that occur when large increments of capacity come on stream at the same time. Still, it requires that the competitors of debt financed consolidators, if any, be disciplined in their growth plans. If competitors choose to grow by expanding capacity then debt burdened consolidators may face supply driven price declines at a time when debt burdens are high.

MAINTAINING CONSISTENCY OF RATINGS We look to maintain the consistency of ratings for the chemical industry during periods of both high and low product prices. We do this recognizing the volatility of cash flow and debt protection measurements that can result from swings in chemical prices as driven by supply and demand imbalances in various economic environments. However, in the speculative grade categories, the ability to maintain ratings is diminished by a generally greater degree of financial and operating leverage and the resultant vulnerability to market swings. Moody's practice for measuring ratios is to use the past two or three years' actual results along with Moody's expectation for the next two or three years' results, and to consider the average as well as the high and low points. This gives us a view of a company's ability to perform in both high and low price environments. For illustrative purposes in this methodology, we have used a combination of both historical data and historical and future data for each of the sample companies as a proxy for the various price environments that Moody's would consider in ratings deliberations.

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Moody’s Rating Methodology

There are important caveats to this approach. • It is important to determine that the product price changes occurring are not driven by permanent structural changes. While we generally try to avoid upgrading or downgrading, within the investment grade categories, based solely on product price conditions, these actions are sometimes necessary if companies exceed or under-perform our prior expectations. • It is equally essential to recognize that product price moves can be exaggerated by unusual events such as 9/ 11, atypical raw material price activity — such as that associated with weather and energy prices — or unique product liability pressures. • There are also a few true specialty chemical and materials businesses that do not exhibit the level of product price movement that distinguishes the rest of the industry. One such example is the small universe of industrial gas companies.

In this Rating Methodology To explain Moody's approach to rating chemical companies, we will walk through the following steps:

1. IDENTIFYING THE KEY RATING FACTORS In identifying rating factors we focus on both qualitative and quantitative metrics that in combination point us to a ratings conclusion. We explain each of these below. The five key rating factors used in Moody's analysis of the chemical industry are as follows: 1. Business Profile 2. Size and Stability 3. Cost Position 4. Management Strategy 5. Financial Strength

2. MEASURING THE RATING CATEGORIES For each rating factor we explain the "sub-factors" or metrics that we use to measure performance for each factor. Some of the measurements are purely quantitative while others include elements of qualitative judgment or – where hard data is not reasonably accessible — educated estimates. To accommodate the cyclical nature of the industry, many of the financial metrics we use are multi-year averages that encompass both past years as well as Moody's estimates of future performance. For the purpose of this methodology, we averaged across the years 2002 thru 2006, except where noted. The metrics used include financial ratios derived from publicly reported financial statements using Moody's standard analytical adjustments (See Moody's Approach to Global Standard Adjustment in the Analysis of Financial Statements for Non-Financial Corporations – Part I, July 2005; Part II, September 2005). Metrics used consist of the following: 1. Business Profile (a) Seven factors added and mapped to a single rating score 2. Size & Stability (a) Scale/Size (b) Market Positions (c) Stability of EBITDA 3. Cost Position (a) Margins (b) ROA = EBIT to Average Assets (this should be calculated on average assets (c) Aggregate contingencies effecting cash flow 4. Management Strategy (a) Debt to Capital * (b) Debt/EBITDA * 5. Financial Strength (a) EBITDA/Interest Moody’s Rating Methodology

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(b) Retained Cash Flow/Debt * (c) Free Cash Flow/Debt * * Where appropriate, net debt may be used (see discussion below on Cash Balances and Net Debt Considerations)

3. MAPPING TO THE RATING CATEGORIES For the 12 discrete metrics cited above, we identify broad performance ranges which are then mapped to the Moody's rating categories from Aa through Caa. We do not narrow the ranges to specific rating levels (for example A1 - A3) within the rating categories.

4. APPLYING THE RATING METHODOLOGY/OUTLIER DISCUSSION To illustrate the methodology we map the 18 representative global credits to a rating on each metric. We recognize, however, that for any given metric there will be companies whose performance is either noticeably better or noticeably worse than the level indicated by their actual rating (e.g. a B-rated company with results more appropriate to a Baa-rated company). In this section we identify all companies whose ratings fall two or more categories higher or lower than their actual ratings. We also provide a discussion of the general reasons for such outliers. At the end of this report (see Appendix I) we display a summary table showing results for each of the selected companies for all 12 criteria. We then average the collected criteria, weighting them equally, and compare them to their actual ratings. Specifically, we score the indicative letter rating in each criteria with a number; a 5 for the Aa rating, 4 for the A rating, 2 for the Ba rating. We then add the numbers together and divide by 12 for an average numerical score. These scores are then mapped back to a rating category as follows: Aa 4.5 or higher A 3.5 -4.49 Baa 2.5-3.49 Ba 1.5-2.49 B 0.5-1.49 Caa 0.49 or lower

The Five Key Rating Factors RATING FACTOR 1: BUSINESS PROFILE Why It Matters Business Profile is an important indicator of credit quality. The chemical team at Moody's looks at seven factors and aggregates them into a single score which is then mapped to a specific rating.

Diversity The first three factors focus on diversity. Diversity is a key component of business position in that diversity, whether it be operational, product, or geographic, can help mitigate the volatility and swings in financial performance characteristic of the chemical sector. • Single site locations as measured by operational diversity can expose a company to the prospect of unanticipated down times. We note that this factor is extremely important. Where a company operates a single site, the risk of that single site failing is deemed to have such a catastrophic impact on the business model that even the prospect of site insurance or business interruption insurance will not provide sufficient mitigation against the potential effects of a fundamental failure of the site. • Diverse product lines can help stem volatility in cash flows to the extent that different products can have varied pricing dynamics. • Geographic diversity can also be beneficial as a company with multiple plant sites can still be negatively affected by both economic and weather related events.

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Moody’s Rating Methodology

Commodity Versus Value Added The fourth factor we consider is commodity versus value added products. In the chemical sector commodity players are typically more volatile in terms of cash flow generation whereas the value added producers often produce more stable cash flows. At times, today's value added producers can become more commodity-like in their cash flow generating capabilities, so we will carefully assess where a product or group of products may be in its life cycle.

Market Share or Unique Competitive Advantage The fifth factor we consider is the market share or unique competitive advantage a company has been able to establish. Large market share suggests a sustainable business position with the proven ability to weather the volatile market conditions in the chemical cycle. In some instances companies with large market shares will adjust their production volumes to help balance the supply and demand dynamics in the markets served as a means to stabilize product pricing. Market share that is protected by patent and unique licensing restrictions can also be a strong, positive contributor to stable cash flows and performance.

Exposure to Volatile Raw Materials The sixth factor we take into account is a company's exposure to volatile raw materials. Raw material exposures greater than 33% in terms of cost of goods sold, for example, can often result in dramatic swings in cash flow. This is especially true in times of supply/demand imbalances. Such imbalances can create shortages in raw materials that can exaggerate raw material price movements. Companies with the ability and foresight to locate their production facilities in areas of the world where they can benefit from long term fixed priced raw materials have a distinct advantage over companies that are subject to the vagaries of the raw material spot markets.

Impact of Government Regulation The seventh factor we assess is the positive or negative impact of government regulation. This factor addresses the positive or negative role that government regulation or policy may have on an individual company or sector of the chemical industry. For many companies, the impact of government regulation may be neutral. For some sectors, such as the ethanol sector, the very existence of the sector is a function of government legislated policy. In still other instances, the government has sought to ban the use of certain products – such as MTBE – in certain markets. This factor is also extremely important and we will, as explained below, overweight it when assessing companies for whom government regulations/mandates are, essentially, the sole driver for the business model.

How We Measure It The seven Business Profile factors are merged into an assessment score, as follows:

Business Profile Assessment Score This score is made up of seven criteria. To each we assign a discrete numerical value. The values across the criteria range from (-2) to 2 with many coming in at 0 or 1. Moody's analysts can use a modifier of 0.5 across the seven criteria to refine the score relative to other companies in the industry. These values are totaled into a score which is then mapped to a rating category in the following manner: Aa = < 4.5 A = 3.5 and 4.0 Baa = 2.5 and 3.0 Ba = 1.5 and 2.0 B = 0.5 and 1.0 Caa= < 0.5 • Operational diversity – We count the number of discrete operating plants that have a globally competitive scale. A (-2) is assigned for 1 or 2 plants, a 0 is assigned for 2 - 8 plants and a 1 is assigned if there are greater than 8 large manufacturing locations. This is one of three factors with a negative score given the importance we assign to operational diversity. A sole site simply leaves the company with too many eggs in one basket. • Product diversity – We assign a 0 if a majority of cash flow is generated from 1-2 key product lines and a 1 if a company relies on 3 or more product lines or product categories. • Geographic diversity – We assign a 0 if a majority of the production assets are primarily in a single geographic region and assign a 1 if production assets are in multiple regions.

Moody’s Rating Methodology

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Commodity versus value added products – We assign a 0 if a majority of sales are primarily commodity products and assign a 1 if we view products as adding distinct unique additional value. Quantitative factors such as stability of EBITDA and EBITDA margins are used later as another component in the measurement of this important factor. • Market share – We assign a 0 if a market share is inconsequential relative to the next three largest competitors and assign a 1 if a sector or company has large share or few real competitors. We would assign a 2 if the company has a unique competitive advantage (patents, know-how, etc.) that could reduce competition significantly. Market share assessments are driven by the definition of the markets served. Definitions should be wide enough to represent legitimate alternative products. • Raw material access – We assign a (-1) or (-2) if we estimate exposure to volatile raw material costs at greater than 33% of costs of goods sold. We assign a 0 if exposure to "volatile" raw materials costs is from 10% to 32% of costs of good sold. We assign a 1 if the exposure to raw materials is less than 10% and a 2 if the company has a material, demonstrable, long-lived feedstock advantage. Given the importance of raw material inputs to ultimate cash flows, especially recently, this metric is vitally important. It is one of two metrics with a negative value. Given the importance of this metric, the value can go as high as 2. • Impact of governmental regulations or policies – For companies subject to significant government regulations or sensitive to changes in government policies, we assign a score reflecting the positive or negative impact of these regulations/policies on the companies' long term financial performance. Most of the companies in this industry will score a 0. Ethanol producers in the US would be assigned a (-1) because of their reliance on government regulation to create demand for the product. Companies that would be positively affected over the long term by government regulations would be assigned a 1. The importance of the business profile score is highlighted by the fact that, in certain cases, it can outweigh all other factors in the methodology materially, lowering ratings significantly. The two most prominent factors are: • operations limited to a single site, and • a business model whose success is highly or solely dependent on government actions or policies.

Factor Mapping: Business Profile Rating Category Business Profile Assessment

Aa

A

Baa

Ba

B

Caa

> 4.5

3.5 and 4.0

2.5 and 3.0

1.5 and 2.0

0.5 and 1.0

< 0.5

Company Mapping: Business Position/Size Current Rating

Operational Diversity

Product Diversity

Geographic Diversity

Commodity/ Specialty

Market Shares

Raw Material Access

Government Impact

Sub Total

Indicative Rating

BASF AG

Aa3

Aa

A3

4.5

Aa

Praxair

A3

5.0

Aa

Rohm & Haas

A3

4.5

Aa

Sumitomo

A3

5.0

Aa

Monsanto

Baa1

3.5

A

Potash of Saskatchewan

Baa1

3.5

A

Eastman Chemical

Baa2

Yara Intl

Baa2

PTT Chemical

Baa3

Nova

Ba2

Basell AF

Ba3

Huntsman

B1

Lyondell Chemical

B1

PolyOne Corp

B2

0 0 0 0 0 0 0 0 -0.5 0 0 0 0 0 0 0 0 0

5.0

Dow Chemical

0 0.5 0 0.5 0 0.5 0 0 1.0 1.5 -0.5 0 0.5 -1.0 -0.5 -0.5 -1.0 -1.5

Aa

A2

1.0 1.0 1.0 1.0 1.0 1.0 0.5 1.0 1.0 1.0 0.5 0.5 0.5 0.5 1.0 0 0.5 0.5

5.0

BOC Group plc

1.0 1.0 1.0 0.5 0.5 0.5 1.0 1.0 1.0 0 0.5 0 0 0 0 0 0 0

Aa

A2

1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0 1.0 1.0 0.5 0.5 1.0 1.0 1.0 0.5

5.5

E.I. DuPont

1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0 0 1.0 0.5 0.5 0.5 1.0 1.0 1.0 1.0

Aa

A1

1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0 1.0 1.0 1.0 0 1.0 1.0 1.0 1.0 1.0

5.0

Shin-Etsu

Issuer

Outliers

8

Positive

Moody’s Rating Methodology

Negative

3.5

A

3.0

Baa

2.0

Ba

1.5

Ba

3.5

A

2.5

Baa

2.5

Baa

1.5

Ba

Observations and Outliers The business profiles score maps closely to actual ratings because the qualitative nature of the criteria allows the analyst to adjust an individual score to reflect nuances in business position. Most of the outliers are positive, reflecting strong business positions that are typically offset by weak financial metrics that lower the current rating. Huntsman is a positive outlier in the business profile score category, as well as in the next two size-related metrics. Huntsman's size is, in large part, a function of historic growth accomplished via debt financed acquisitions that have served to keep many of Huntsman's financial metrics very low. Huntsman's weak financial metrics are a key offset to its investment grade business position. The company is currently endeavoring to reduce debt using the proceeds from an initial public offering and future free cash flow. Companies in the ethanol industry would be negative outliers as the prospect of negative legislative action is deemed, over the intermediate to long term, sufficient to overweigh other criteria. This results in a materially lower rating indication than the methodology would otherwise suggest.

RATING FACTOR 2: SIZE AND STABILITY Why It Matters This factor includes discrete quantitative measures that attempt to measure size, diversity and the stability of a business model. Large revenues combined with large divisions as well as a long history of stable performance suggest sustainable business positions that have been and will be demonstrably able to weather the vagaries of capital and economic cycles.

Size Size can suggest the ability to benefit from much needed economies of scale both in production and access to raw materials on a preferred basis. In addition, size suggests the ability to service large customers globally — an important attribute as many customers step up efforts to reduce the number of their suppliers. Size also tends to favor the companies that sovereigns, government related entities, and other large companies choose as their joint venture partners or technology suppliers.

Number of Divisions The presence of multiple large divisions typically signals a balanced product portfolio and, by extension, more stable cash flows. Companies with high product concentration may exhibit more volatile cash flows and may be more vulnerable to one time events that can be damaging to credit quality. Multiple divisions also provide for discrete assets that can be sold as necessary to provide alternate liquidity. Larger companies with many divisions can, for example, sell weaker performing segments, with the sale proceeds providing funding for debt reduction or growth in other segments.

Stability of Business Model (Stability of EBITDA) Given the diversity of this industry, we attempt to gauge the likely level of volatility in earnings and cash flow. Companies with elevated levels of volatility in earnings and cash flow will require better liquidity and more robust financial metrics, on average, to compensate for uncertainty over the magnitude and duration of potential downturns. We analyze the volatility of EBITDA over a long period of time (7-10 years, when the data is available) to get an estimation of the expected volatility of the company relative to its peers in the industry. While there are many problems associated with the use of EBITDA as a measure of either profitability or cash flow, EBITDA is typically less affected by extraordinary items, fluctuations in working capital, and capital spending on new capacity than other measures of cash flow. It also allows us to remove the potential impact from differences in capital intensity across the industry. To the extent that a company's EBITDA may contain unusual items, or items that we judge to be one-time items, the reported data may be adjusted to improve the quality of the analysis and hence get a better view of the true volatility of the company relative to its peers in the industry.

How We Measure It Size Measured by Revenues We use the most recent annual revenues. The current year's revenues obviously can be either understated or overstated subject to where the company is in the commodity price cycle. While the commodity price cycle may be different for various companies, this metric measures all companies, by and large, at the same point in the economic Moody’s Rating Methodology

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cycle. For companies whose revenues are on the border between two ratings categories, Moody's would consider the point in the commodity price cycle at which the measurement is taken.

Divisions with Revenues of Equal Relative Size This factor can be captured from financial statements. We use the most recent quarterly report on a latest four quarter basis. We are attempting again to capture both diversity as well as scale. The analyst may adjust segment revenues manually to adjust for non-ordinary items or non-public segment information provided by management. For companies whose divisional revenues are volatile and subject to cycles, Moody's would again consider the point in the pricing cycle at which the measurement is taken. Our focus is to measure diversity of revenue streams – For a company with $1 billion in revenues – if all revenues come from a sole division/product it would map to a B, if there were four discrete divisions with $250 million in revenues each (essentially equal in size) it would map to a Baa. For a company with $10 billion in revenues with four discrete divisions/products if two divisions had $3 billion each and 2 divisions had $2 billion each – it would still be judged to be relatively diverse and equate to a Baa.

Stability of EBITDA This factor is measured by the historical standard error of the company's EBITDA as determined by a least squares regression on seven to ten years of data. We utilize standard error rather than standard deviation as it is much better at differentiating between commodity and specialty chemical companies. Standard deviation is a static measure that cannot clearly differentiate between a stable company growing over time and a commodity company whose volatility is induced by changes in its cash margins. Standard error is a statistical measure of the difference between the company's actual performance versus a theoretical line drawn through the data (hence its ability to compensate for growth over time). For companies with less than seven years' worth of data, or for companies that have undergone a transforming transaction within the past seven years, we either estimate the standard error based on the characteristics of the company's products and end-markets or we make adjustments to the data to get a pro forma EBITDA for the seven to ten-year period. A transforming transaction is defined as the acquisition or divestiture of assets that comprise more that 1/3 of the pre-transaction EBITDA. For companies that have undergone transforming acquisitions or substantial divestitures, we may adjust the time horizon to reflect the lack of available data. This measurement is designed to capture two types of stability: 1. For smaller companies – The stability of business or businesses relative to other companies in the industry. The absolute size of a company is not considered. 2. For larger companies – A very large or diverse commodity company may exhibit more stability based on the number of businesses in its portfolio, especially if the earnings of their individual businesses are not correlated (i.e., all businesses don't go into a downturn or upturn at the same time). In statistical terms, if the covariance of the businesses is low, the company's performance should be more stable although it may be an inherently cyclical commodity chemical company. Companies with a normalized standardized error above 40% (which maps to the Caa category) are most common for companies with negative EBITDA at the bottom of a downturn.

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Moody’s Rating Methodology

Factor Mapping: Size & Stability Revenues (Billions of $) Divisions of Equal Size Stability of EBITDA

Aa

A

Baa

Ba

B

Caa

$10 - $20 6 Excellent < 6%

$5 - $9.9 5 Strong 6% - 11.9%

$2-$4.9 4 Adequate 12% - 19.9%

$1-$1.9 2-3 Weak 20% - 29.9%

< $1 1-2 Poor 30% - 39.9%

< $0.2 1 Deficient > 40%

Company Mapping: Business Position/Size Issuer BASF AG Shin-Etsu E.I. DuPont BOC Group plc Dow Chemical Praxair Rohm & Haas Sumitomo Monsanto Potash of Saskatchewan Eastman Chemical Yara Intl PTT Chemical Nova Basell AF Huntsman Lyondell Chemical PolyOne Corp Outliers

Current Rating

Revenues Most Rec. FYE (Millions)

Indicative Category

Aa3 A1 A2 A2 A3 A3 A3 A3 Baa1 Baa1 Baa2 Baa2 Baa3 Ba2 Ba3 B1 B1 B2

$42,400 $9,000 $27,430 $8,519 $40,161 $6,594 $7,300 $12,100 $5,457 $2,901 $6,580 $6,500 $600 $5,270 $8,200 $11,486 $23,900 $2,162

Aa A Aa A Aa A A Aa A Baa A A B A A Aa Aa Baa

Positive

Number of Divisions of equal size 6 4 5 4 5 5 5 6 2 1 5 3 2 2 3 3 3 2

Indicative Category

Stability of EBITDA

Indicative Category

Aa Baa A Baa A A A Aa Ba B A Ba B Ba Ba Baa Baa Ba

17% 7% 20% 5.5% 21% 6% 15% 8% 27% 27% 24% 33% 52% 62% 20% 27% 34% 33%

Baa A Ba Aa Ba Aa Baa A Ba Ba Ba B Caa Caa Ba Ba B B

Negative

OBSERVATIONS AND OUTLIERS Revenue Size: Similar to the outliers in the business position score, most of the outliers are in the lower rating categories and are positive in that the ratings balance size and business position against weak financial metrics.

Divisions of Equal Size: Monsanto's two main areas of focus, seeds/genomics and agricultural chemicals, result in a negative outlier status for Monsanto's market position as measured by business divisions. This limitation is offset by diversity within the divisions' offerings, particularly within the seed and genomic division. Potash is a negative outlier in number of divisions of equal size criteria given its reliance on a single fertilizer for the majority of its revenues. This is more than offset by its large market shares and low cost positions.

Stability of EBITDA: This metric demonstrates the most outliers and they tend to be negative. These negative outliers reflect the nature of commodity chemical companies and the volatility of their EBITDA over time. In many instances the score is negatively affected by large charges associated with restructuring and cost cutting programs. While we expect higherrated commodity chemical companies to be outliers in this metric, this weakness is offset by other positive factors such as the potential for strong, but intermittent, free cash flows that can be used for rapid debt repayment. This metric also demonstrates unusually strong scores for the stable industrial gas companies, BOC Group and Praxair. This metric's importance to the methodology is demonstrated by the clear differentiation of specialty chemical companies from the more volatile commodity producers. DuPont is a negative outlier in the stability of EBITDA category, in part, because of the portfolio restructuring it has undergone in the last seven years. EBITDA, when normalized for one time charges related to restructuring efforts, presents a more stable picture. Moody’s Rating Methodology

11

BASF is also a negative outlier in this category. In addition to the cyclicality of its more commodity-like businesses, this score also reflects the effect of significant charges incurred over the past few years as BASF management restructured the group's business portfolio. Provisions for litigation and charges associated with vitamins anti-trust issues some years ago also added to volatility. However, it should be taken into account that recent increases in earnings levels also contributed to that volatility. In addition to the inherent volatility of Yara's core nitrogen-based fertilizer business, Yara's EBITDA score also reflects the charges associated with a significant turnaround program. This program, designed to cut capacity and reduce operating costs, was undertaken to facilitate the separation of Yara from Norsk Hydro.

RATING FACTOR 3: COST POSITION Why It Matters Relative cost position is a critical success factor for a chemical company because, in a downturn, (either cyclical or economic) prices often decline to the point where only companies with first and second quartile cash costs generate meaningful cash flow. Operating cost positions are a function of criteria that include size, access to low cost raw material inputs, location of assets, labor rates, and capital invested. Further, with low levels of financial leverage, low cost producers are typically better positioned to outperform competitors. Low cost producers with low leverage are better able to survive in a downturn and are also better positioned to grow when opportunities arise. A company's cash costs and its position on the industry cost curve, as well as the overall shape of the industry cost curve, are all valuable information. However, true cash cost curve data, while useful, is often proprietary or may be the property of various consultants and difficult to verify. Comparisons across the wide variety of commodity and specialty chemical companies make it difficult to rely on relative or absolute costs for ranking companies. We use three measures in addition to information provided by companies to assess cost positions: • EBITDA Margin • Return on Average Assets • Unique Contingencies

How We Measure It EBITDA Margin This factor is used in part to gauge the quality of the pricing power a company has and is likely to achieve. It is measured using EBITDA, which includes recurring "other" income and excludes non-recurring "other" income and one time charges. This factor, along with several others, is an important measure of a company's profitability in multiple economic scenarios. Moody's practice for these ratios is to use the past two or three years' actual results along with Moody's expectation for the next two or three years, and to consider the average as well as the high and low points. For illustrative purposes the measurement used in the company examples herein is based on an average of the past five years' EBITDA margin. The choice of EBITDA, versus EBIT, is driven in part by the many and varied depreciation polices used globally and the need for comparability between regions. Nonetheless, we recognize the weaknesses of EBITDA, discussed below, and analysts within regions will also evaluate EBIT margins as well. Another reason for the use of EBITDA is the material difference in capital intensity within sub-sectors of the chemical industry. The capital intensity of a large commodity company can be very different from a smaller specialty player. The use of EBITDA – as opposed to EBIT – has a disadvantage in that EBITDA fails to address the capital intensity of the chemical industry effectively. Clearly an important indicator of a company's ability to generate operating profit should be assessed after the costs of plant maintenance and capacity expansion, as represented by its annual depreciation charges. Experience indicates that while a chemical company's capital spending often swings with major projects, it will generally need to 'spend' its depreciation over time as it maintains and develops new facilities. We attempt to capture the effect of this capital intensity in our use of free cash flow metrics in the financial strength rating factor discussion.

12

Moody’s Rating Methodology

Return on Average Assets This is a strong measure of a company's ability to generate a consistent and meaningful return from its asset base. This metric specifically takes into account the capital intensive nature of the industry. This is also a five-year average measurement using the past three years' of actual results along with Moody's expectation for the next two years. In each year, where available, EBIT is divided by the average of the current and last year's assets and the resulting group of ratios is averaged into a single metric. We use total assets, less cash and short term investments rather than tangible assets to provide a more meaningful measure for the universe of speculative grade companies.

Average Contingency Payments The level of "other" or "legacy" liabilities and their associated ongoing cash costs can be a key differentiating factor between companies and sectors. We broadly define these legacy liabilities into three areas to include: • Asbestos exposure • Reclamation and environmental costs • Other company specific costs (such as legal indemnifications.) We aggregate the annual cash impact within these three broad areas, measure it against the annual cash flow from operations, and assess the impact by looking at the past five year averages. There can be a high degree of variability in the aggregate impact of these contingencies over the years. These contingencies and the range of potential estimates for exposures may also be confidential and thus inappropriate to discuss in specifics. These contingencies can often be unique to a particular company or they may occur broadly across the industry (as would be the case of annual environmental remediation expense). Moody's analysts also adjust the ratio, if needed, to reflect anticipated future exposures, particularly if these exposures are expected to increase or decrease materially in future years. We acknowledge, however, that there can be a high degree of subjectivity in our estimates of future exposures.

Factor Mapping: Cost Position EBITDA Margin (5 yr Avg,) ROA - EBIT/Average Assets (5 yr Avg.) Contingencies as % of Cash from Operations (5 yr. Avg.)

Aa

A

Baa

Ba

B

Caa

> 20% > 15% 20%

< 4% < 2% > 25%

Ratings Mapping: Cost Position Rating BASF AG Shin-Etsu E.I. DuPont BOC Group plc Dow Chemical Praxair Rohm & Haas Sumitomo Monsanto Potash of Saskatchewan Eastman Chemical Yara Intl PTT Chemical Nova Basell AF Huntsman Lyondell Chemical PolyOne Corp Outliers

Aa3 A1 A2 A2 A3 A3 A3 A3 Baa1 Baa1 Baa2 Baa2 Baa3 Ba2 Ba3 B1 B1 B2 Positive

EBITDA Margin 5yr Avg 19% 25% 21% 20% 15% 26% 19% 13% 21% 27% 13% 14% 27% 11% 9% 10% 9% 8%

Indicative Category A Aa Aa Aa A Aa A Baa Aa Aa Baa Baa Aa Ba Ba Ba Ba B

ROA - EBIT/Assets 5yr Avg 13% 9% 11% 10% 9% 12% 9% 3.7% 8% 9% 8% 13% 14% 5% 3% 9.7% 5% 6%

Indicative Category A Baa A A Baa A Baa B Baa Baa Baa A A Ba B Baa Ba Ba

Contingencies as a % of Cash 81% >6X

* Where appropriate net adjusted debt may be used (see discussion below Cash Balances and Net Debt Considerations

Company Mapping: Management Strategies

BASF AG Shin-Etsu** E.I. DuPont BOC Group plc Dow Chemical Praxair Rohm & Haas Sumitomo Monsanto Potash of Saskatchewan Eastman Chemical Yara Intl PTT Chemical Nova Basell AF Huntsman Lyondell Chemical PolyOne Corp Outliers

Rating

Current Debt/Capital

Indicative Category

Total Debt/EBITDA 5yr Avg.

Indicative Category

Aa3 A1 A2 A2 A3 A3 A3 A3 Baa1 Baa1 Baa2 Baa2 Baa3 Ba2 Ba3 B1 B1 B2

16% * NM 46% 56% * 58% 53% 38% 32%* 35% 35% 58% 45% * 27% 56% 92% 81% 73% 68%

Aa Aa Baa Ba Ba Ba Baa A A A Ba Baa A Ba Caa Caa B Ba

0.7X * NM 2.2X * 2.4X * 3.7X 2.4X 2.6X 2.3X* 2.2X 3.8X 3.8X 2.2X * 2.9X 5.0X 5.0X * 6.9X 9.0X 6.5X

Aa Aa A Baa Ba Baa Baa Baa A Ba Ba A Baa B B Caa Caa Caa

Positive

Negative

** For Shin-Etsu Current Debt/Capital and Total Debt/EBITDA are not calculated as the issuer has negative net debt

Observations and Outliers Debt to Capitalization: Dow’s elevated leverage makes it a negative outlier, reflecting sizable acquisitions undertaken by the company in 2001, substantial liabilities related to operating leases and pensions, the large run-up in working capital attributable to elevated petrochemical prices, and unusually weak earnings in the 2001-2002 timeframe. Dow's leverage has come down significantly over the past 18 months, but still remains high relative to historic norms. Moody’s Rating Methodology

15

Praxair's leverage makes it a negative outlier, but this is more a function of the high initial balance sheet leverage it inherited on its spin-off from Union Carbide in 1993 and the capital intensive nature of the business, rather than on an aggressive financial management. Basell AF is a negative outlier. Following the leveraged buy-out in 2Q 2005, Nell has sustained an elevated level of leverage. This high level of debt is reflected both in debt to EBITDA and in current debt/capital ratios. Nell's elevated leverage remains one of the key considerations underpinning the current rating.

Debt to EBITDA: Dow's debt to EBITDA is again a negative outlier for the same reasons cited above. On an LTM basis ending June 30, 2005, Dow's debt to EBITDA fell to 2.3 times, which is more consistent with a high Baa rating. The negative outlook on Dow's ratings reflects our concern over management's ability to improve and maintain more robust financial metrics.

RATING CATEGORY 5: FINANCIAL STRENGTH Why It Matters The three key indicators of financial strength are 1) Interest Coverage, 2) Retained Cash Flow to Debt, and 3) Free Cash Flow to Debt. All of these metrics are averaged over five-year periods to address the volatile nature of the industry. Interest coverage: Interest coverage can be particularly meaningful for speculative grade companies. This is especially true if the interest rate environment is in a period of change — such as the migration from lower rates to higher rates — and an issuer is facing the need to refinance debt that is nearing maturity. It is a less important metric for higher-rated companies. The remaining two metrics are useful across the rating spectrum and relate to the amount of cash flow available to cover varied scenarios of both operating needs and financing needs. • Operating needs include major items such as working capital and capital spending. • Financing needs refers to the impact of dividends and the "free" cash then available to service debt. As discussed above, the use of EBITDA (as opposed to EBIT) in the interest coverage ratio is important for companies in the chemical industry and the decision to use it is a function of the need to make the ratio more comparable globally. Retained Cash Flow and Free Cash Flow: The cash flow metrics we use measure two different levels of cash flow: retained cash flow and free cash flow and their ratio to total adjusted debt. • Retained cash flow is a broader measure of financial flexibility than free cash flow as it excludes the potential 'noise' created by changes in working capital and unusual capital spending programs. This is a helpful measure given the volatility and the variation in capital intensity within the chemical sector. As with other factors in which debt is involved we can look at these cash flow metrics in two ways — as a percentage of both debt and of net debt (net of cash balances). We use net debt for companies at which it is either a stated, long-lived policy to hold material cash balances or for which there may be unique scenarios such as recent asset sales whereby cash may be earmarked for use in debt reduction efforts. In some specific instances we may use a net debt denominator for the free cash flow metric as well. A more detailed discussion of our views on cash balances appears below. Free cash flow is, in many instances, one of the most important and reliable measures of financial strength and flexibility. This metric reflects a company's primary source of liquidity as it directly speaks to management's ability to service its debt burden after considering both its operating and financial commitments to shareholders. In this metric we often identify where capital spending programs may be extraordinarily large and or risky. At times, programs can have a direct impact on ratings because of the size of expenditure that may be involved as well as the risks of executing the program on time and on budget. If, for example, a large amount of capital is spent on new greenfield capacity and we believe that such capacity is being added at a time when product prices are low (i.e. there is a lack of an adequate return on this capital) the ratings may be negatively affected. There is also the risk that anticipated operating cash cost benefits upon project completion are different than expected.

16

Moody’s Rating Methodology

How We Measure It Interest coverage This metric is a straightforward look at the most recent period's EBITDA (adjusted for non-recurring other income and one-time charges) to gross interest expense (including capitalized interest). This is a five-year measure.

Cash Flow to Debt • •

Retained Cash Flow to Debt – Defined as net income plus depreciation and amortization minus dividends plus or minus one-time non-cash items. This is a five-year measure. Free Cash Flow to Debt – Defined as operating cash flow (by its nature operating cash flow is determined after taking into account working capital) minus capital spending and dividends, as a percentage of total adjusted debt. This is a five-year measure.

Cash Balances and Net Debt Considerations Typically, analysts on Moody's Global Chemical team approach the use of cash balances and the use of cash in "net debt" calculations in a conservative fashion. As a general rule we would not typically consider cash on the balance sheet as a true offset to adjusted total debt in terms of ratio analysis. Reasons that we would not look at cash on the balance sheet as fungible for the debt include concern that: • the cash is easily used for other purposes and debt reduction is only counted when debt is permanently reduced • in some instances cash is actually needed to fund the annual day-to-day operations of the issuer • the cash is "stranded' overseas and subject to material taxes such that the true cash balance is materially lower than represented in the financial statements • there may be other claims on the cash for restructuring efforts or legacy liabilities. There are, however, examples where our analysis for chemical companies incorporates cash balances as providing a measure of offset to adjusted total debt balances. Exceptions to the above analytical approach, for which Moody's gives credit for cash balances include: • the specific refunding of near term debt maturities wherein management borrows in advance to prefund a near term maturity. • cash is held temporarily for legal, tax or other purposes and the company has publicly stated its intention to reduce debt once the temporary period has ended. Other instances, typically only for large companies, include situations in which management has a history of maintaining material levels of cash on the balance sheet, it has publicly stated its intention not to pursue large-debt financed acquisitions or share repurchases, and cash is accessible without meaningful loss to taxes. In Europe, we also generally observe that companies are more willing to maintain higher cash balances that may sometime be linked to tax considerations or more broadly reflect a more conservative style of financial policies. Considering only gross debt may not reflect the real financial strength of these companies and Moody's may prefer in this case to focus on net debt. In these cases, however, we capture the expectation that these cash balances can be liquidated at least at book value and without tax costs.

Moody’s Rating Methodology

17

Factor Mapping: Financial Strength Aa EBITDA/Total Interest Expense (5yr avg.) > 15.1X Retained Cash Flow/Debt (5yr avg.) * > 45.1% Free Cash Flow (FCF)/Debt (5yr avg.) * > 25.1%

A

Baa

Ba

B

Caa

10X - 15X 30% - 45% 15% - 25%

5X - 9.9X 20% - 29.9% 8% - 14.9%

2X - 4.9X 10% - 19.9% 4% - 7.9%

< 1.9X 5% - 9.9% 0.1% - 3.9%

< 1X < 4.9% < 0%

* Where appropriate net adjusted debt may be used (see discussion below Cash Balances and Net Debt Considerations

Company Mapping: Financial Strength

BASF AG Shin-Etsu E.I. DuPont BOC Group plc Dow Chemical Praxair Rohm & Haas Sumitomo Monsanto Potash of Saskatchewan Eastman Chemical Yara Intl PTT Chemical Nova Basell AF Huntsman Lyondell Chemical PolyOne Corp Outliers

Rating

EBITDA/Interest 5yr Avg.

Indicative Category

RCF/Debt 5yr Avg.*

Indicative Category

FCF/Debt 5yr Avg.*

Indicative Category

Aa3 A1 A2 A2 A3 A3 A3 A3 Baa1 Baa1 Baa2 Baa2 Baa3 Ba2 Ba3 B1 B1 B2

20.0X 79.0X 7.6X 9.0X 5.8X 8.0X 7.8X 21.8X 7.6X 7.1X 5.8X 9.2X 8.1X 3.8X 4.8X 2.6X 2.2X 2.1X

Aa Aa Baa Baa Baa Baa Baa Aa Baa Baa Baa Baa Baa Ba Ba Ba Ba Ba

72% * 131% 30% * 22% * 19.5%* 30% 25%% 30%* 36% 27% 17%* 26% * 33% 14% 17% * 15% 6% 1%

Aa Aa A Baa Ba A Baa A A Baa Ba Baa A Ba Ba Ba B Caa

26% * 42% 9% 4%* 7.6%* 12% 12%* 3.5%* 27% 14% 6%* 12% * -15% 5% 6% 9% 3% 0.4%

Aa Aa Baa Ba Ba Baa Baa B Aa Baa Ba Baa Caa Ba Ba Ba B B

Positive

Negative

* Where appropriate net adjusted debt may be used (see discussion below Cash Balances and Net Debt Considerations

Observations and Outliers Cash Flow to Debt The outliers in these criteria are negative and focus on the investment grade companies in the sample. The majority of the negative outliers occur in the free cash flow criteria. The negative nature of the outliers is primarily a function of the weak industry trough conditions that occurred in the early years of the measurement period. The combination of the trough conditions, the capital-intense nature of the industry, and the annual spending needed to maintain plants is the key reason for these outliers. Dow's financial average financial metrics generate a negative rating outlier for both of the cash flow to debt scores. Both scores are, however, on the borderline between Ba and Baa. Current LTM financial metrics are more consistent with a high Baa rating and the company's negative rating outlook reflects our concern over management's ability to improve and maintain more robust financial metrics Sumitomo Chemical is a negative outlier in FCF/debt, reflecting the acceleration of its capital spending in ITrelated chemicals. In addition, management has promoted an expansion of its basic chemicals and petrochemicals business segments. This high level of capital spending will be mitigated by Sumitomo's improved market positions in Asia and enhanced cost positions. PTT Chemical is a negative outlier in FCF/debt category, reflecting the large capital spending program the company is planning over the next few years.

18

Moody’s Rating Methodology

FINAL CONSIDERATIONS Appendix I and II illustrate the mapping and ratios for each of the twelve measured factors as well as each company's overall implied rating using an "equal" weighting for each factor. The mapped individual letter ratings are then averaged to produce the Indicative Average Rating. For each factor we have highlighted favorable and unfavorable outliers of two or more full rating categories. Among our conclusions: • Results obtained from weighting the factors equally and averaging them indicate that ten issuers (56% of the representative sample) map at their assigned rating categories and eight issuers (44%) fall within one rating category of their assigned ratings. No issuers map two or more notches away from their assigned ratings. • As can be seen in the chart, the indicated rating categories for most of the companies vary considerably across the factors. The more highly rated companies such as BASF and Shin-Etsu tend to demonstrate the diversity of operational scale and size and more moderate leverage relative to earnings and cash flow generation that provide for financial flexibility through the pricing peaks and valleys. • For many companies, the indicated rating categories vary considerably across the factors. A given company may represent a favorable or high outlier for some of the twelve measurements and an unfavorable or low outlier for others. There are no companies that consistently rate equal to or above their current rating. There are also no companies that rate consistently equal to or below their current rating. • Although all factors are weighted equally in arriving at the Indicative Average Rating, measurement of the degree of leverage employed in the capital structure relative to both earnings and cash flow generation is an important rating consideration, with debt represented in four of the seven financial metrics. • We believe the rating methodology is useful in identifying companies that fall outside of the indicated ranges for any of the measurement criteria – either favorably or unfavorably – and for determining whether there are offsetting factors to compensate.

Moody’s Rating Methodology

19

20

Appendix I

Moody’s Rating Methodology

All Factors Given Equal Weight and Averaged BASF

Shin-Etsu

DuPont

BOC

Dow

Praxair

Rohm & Haas

Sumitomo

Potash Monsanto of Sask

Eastman Chem.

Yara

PTT Chemical

Nova

Basell AF

Huntsman Lyondell

PolyOne

Actual Rating

Aa3

A1

A2

A2

A3

A3

A3

A3

Baa1

Baa1

Baa2

Baa2

Baa3

Ba2

Ba3

B1

B1

B2

Business Position Score Size By Revenues Markets/Divisions EBITDA Stability EBITDA Margins ROA Contingencies Debt/Capital Debt/EBITDA EBITDA/Interest RCF/ Debt FCF/ Debt

Aa

Aa

Aa

Aa

Aa

Aa

Aa

Aa

A

A

A

Baa

Ba

Ba

A

Baa

Baa

Ba

Aa Aa Baa A A Aa Aa Aa Aa Aa* Aa

A Baa A Aa Baa Aa Aa Aa Aa Aa Aa

Aa A Ba Aa A Aa Baa A* Baa A* Baa*

A Baa Aa Aa A Aa Ba Baa Baa Baa* Ba

Aa A Ba A Baa A Ba Ba Baa Ba* Ba*

A A Aa Aa A Aa Ba Baa Baa A Baa

A A Baa A Baa Aa Baa Baa Baa Baa* Baa*

Aa Aa A Baa B Aa A* Baa* Aa A* B*

A Ba Ba Aa Baa Baa A A Baa A Aa

Baa B Ba Aa Baa A A Ba Baa Baa Baa

A A Ba Baa Baa A Ba Ba Baa Ba* Ba*

A Ba B Baa A Aa Baa A Baa Baa* Baa*

B B Caa Aa A Aa A Baa Baa A Caa

A Ba Caa Ba Ba Aa Ba B Ba Ba Ba

A Ba Ba Ba B Aa Caa B Ba Ba* Ba*

Aa Baa Ba Ba Baa Baa Caa Caa Ba Ba Ba

Aa Baa B Ba Ba Aa B Caa Ba B* B*

Baa Ba B B Ba A Ba Caa Ba Caa B

Indicative Average Rating Actual Rating

Aa

Aa

A

A

Baa

A

Baa

A

A

Baa

Baa

Baa

Ba

Ba

Ba

Ba

Ba

Ba

Aa3

A1

A2

A2

A3

A3

A3

A3

Baa1

Baa1

Baa2

Baa2

Baa3

Ba2

Ba3

B1

B1

B2

Outliers

Positive

Negative

* Where appropriate net adjusted debt may be used (see discussion Cash Balances and Net Debt Considerations)

This summary table shows the results for each of the selected companies for all 12 criteria. We then average the collected criteria, weighting them equally, and compare them to their actual ratings. Specifically, we score the indicative letter rating in each criteria with a number. For example, we score a 5 for the Aa rating, 4 for the A rating, 2 for the Ba rating. We then add the numbers together and divide by 12 for an average numerical score. These scores are then mapped back to a rating category as follows: AA 4.5 or higher; A 3.5 - 4.49; Baa 2.5 - 3.49; Ba 1.5 - 2.49; B 0.5 - 1.4; and Caa 0.49 or lower.

Appendix II Company Ratings on Key Rating Factors and Sub-Factors Rating Category

Aa

A

Baa

Ba

B

Caa

> 4.5

3.5 and 4.0

2.5 and 3.0

1.5 and 2.0

0.5 and 1.0

< 0.5

$10 - $20 6 Excellent < 6%

$5 - $9.9 5 Strong 6% - 11.9%

$2-$4.9 4 Adequate 12% - 19.9%

$1-$1.9 2-3 Weak 20% - 29.9%

< $1 1-2 Poor 30% - 39.9%

< $0.2 1 Deficient > 40%

> 20% > 15% 20%

< 4% < 2% > 25%

4.1X

> 81% >6X

> 15.1X > 45.1% > 25.1%

10X - 15X 30% - 45% 15% - 25%

5X - 9.9X 20% - 29.9% 8% - 14.9%

2X - 4.9X 10% - 19.9% 4% - 7.9%

< 1.9X 5% - 9.9% 0.1% - 3.9%

< 1X < 4.9% < 0%

Rating Factors 1) Business Profile Business Position Assessment 2) Size & Stability Revenues (Billions of $) Number of Divisions of = Size Stability of EBITDA 3) Cost Position EBITDA Margin (5 yr Avg,) ROA - EBIT/Assets (5 yr Avg.) Contingencies as % of Cash from Operations (5 yr. Avg.) 4) Management Quality Current Debt/Capital * Debt/EBITDA * (5 yr Avg.) 5) Financial Strength EBITDA/Total Interest Expense (5yr avg.) Retained Cash Flow/. Debt (5yr avg.)* Free Cash Flow (FCF)/ Debt (5yr avg.)*

* Where appropriate net adjusted debt may be used (see discussion Cash Balances and Net Debt Considerations)

Moody’s Rating Methodology

21

Key Ratio Definitions Chemical Methodology EBITDA MARGIN (5-YEAR AVERAGE) EBITDA = Pretax Income + Depreciation and Amortization + Interest expense +/- other recurring income/expense other non-recurring income/expense - income from partially-owned entities + cash dividends received from partiallyowned entities. EBITDA Margin (%) = 5 year average of annual EBITDA divided by annual revenues. 2002-2006

RETURN ON AVERAGE ASSETS (5-YEAR AVERAGE) EBIT = Pretax Income + Interest expense +/- other recurring income/expense - other non-recurring income/expense income from partially-owned entities + cash dividends received from partially-owned entities. ROA (5 year average) = 5 year average of annual EBIT Divided by Total Assets less cash and short term investments 2002-2006

DEBT TO CAPITALIZATION (MOST RECENT YEAR OR REPORTED PERIOD) Debt = ST debt + LT debt + operating leases (using Moody's modified present value approach) + unfunded pension liabilities + securitizations + preferred shares & hybrids. (Debt can, where appropriate with committee approval, be adjusted for cash and cash like balances that are viewed as an offset to debt.) Capitalization = Debt + deferred taxes + Minority interest + Book equity, adjusted to include other adjustment to debt noted above Debt to Capitalization = Most recent year's debt divided by most recent year's capitalization.

DEBT TO EBITDA (5-YEAR AVERAGE) EBITDA = EBIT + DD&A. Debt to EBITDA = 5 year average of annual year end debt divided by annual EBITDA.

INTEREST COVERAGE (5-YEAR AVERAGE) Interest expense = Gross interest + Capitalized portion of interest. Interest Coverage = 5-year average of annual EBITDA divided by annual interest expense.

RETAINED CASH FLOW TO DEBT (5-YEAR AVERAGE) Retained Cash Flow = Net Income + depreciation +amortization + deferred taxes + minority interests +cash dividends from investments + non recurring non cash charges - non cash equity income - common dividends - preferred dividends. RCF to Debt = 5 year average of annual retained cash flow divided by debt.

FREE CASH FLOW TO DEBT (5-YEAR AVERAGE) Free Cash Flow = Retained cash flow after (+ or -) working capital minus gross capital expenditures. FCF to Debt = 5 year average of annual free cash flow divided by debt.

22

Moody’s Rating Methodology

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Dan Marx

Wing Chan

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Moody’s Rating Methodology