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Rating Action:

MOODY'S CONFIRMS PORT ARTHUR FINANCE & PREMCOR RATINGS; RETAINS NEGATIVE OUTLOOK

13 Dec 2000
MOODY'S CONFIRMS PORT ARTHUR FINANCE & PREMCOR RATINGS; RETAINS NEGATIVE OUTLOOK

$630 Million of Port Arthur Project Debt & $1.06 Billion of Premcor Bonds & Prefs Affected

New York, December 13, 2000 -- Moody's Investors Service confirms Port Arthur Coker Co.'s (PACC) and Premcor's ratings, retaining the present negative rating outlooks. Confirmations include: (1) Port Arthur Finance Co. (PAF) Ba3 $255 million of 12.5% senior secured notes due 2009, $325 million of Tranche A and B senior secured bank debt, and $50 million secured working capital revolver; (2) Premcor USA (PUSA) B3 $175 million of 11 7/8% senior unsecured notes due 2005 and "caa" $88 million of 11.5% PIK preferred stock; (3) The Premcor Refining Group (PRG) Ba3 senior unsecured $110 million of 8 5/8% notes due 2008, $100 million of 8 3/8% notes due 2007, $172 million of 9 ½% notes due 2004, and $240 million of floating rate bank loans, and B2 senior subordinated $175 million of 8 7/8% notes due 2007. Moody's does not rate PRG's $700 million secured working capital facility. The Premcor senior implied rating is Ba3. These actions follow amendments to PACC's bank credit and letter of credit insurance facilities, as well as revisions to Purvin & Gertz' (PG) PACC cash flow forecasts.

PUSA owns all of PRG (together, PUSA and PRG are herein defined as Premcor). PAF is PACC's financing arm, funding PACC through intercompany notes. PRG operates PACC; PACC owns key deep conversion units being built in PRG's flagship refinery. Premcor Inc. (PI) owns all of PUSA and, through Sabine River Holding Corp., 90% of PACC. The Blackstone Group controls 81% of PI, Occidental Petroleum owns 18% of PI, and Occidental directly owns 10% of Sabine/PACC. PACC is strategic to PRG and to Blackstone's exit plans for its $264 million Premcor/PACC investment. Moody's ties PACC's ratings to Premcor's.

RATING OUTLOOK:

In spite of full PACC mechanical completion later this month and PRG's strong 2Q00 results, the rating outlook remains negative. Moody's is optimistic for PACC's ability to reach design performance in first-half 2001, but PRG is highly leveraged in a volatile sector, PACC's fortunes are tightly entwined with PRG's, and PACC is a cash-consuming project until reaching design performance. Yet base case forecasts imply PACC might commence dividends to PI by 2003. But Blackstone's self interest would dictate whether to downstream that cash to Premcor, realized PACC and PRG margins are volatile, results below mid-cycle levels would defer PACC dividends, and PRG may need results above mid-cycle levels to avoid a rise in net debt.

In addition to a more cautious refining outlook, the outlook reflects: (1) very high Premcor debt relative to asset value, volatile cash flow, mid-cycle cash flow after capex and interest, and liquidity needs; (2) high consolidated Premcor/PACC debt on consolidated PI asset values and earnings potential; (3) the cash impact of PRG's 3Q00 under-performance; (4) PRG's elevated letter of credit, working capital, and liquidity needs due to high oil prices; (5) PRG's exposure on 56% of its throughput volumes to often vexing Midwest sector margins and under-performance to those margins, and (6) PACC's remaining hurdle of attaining design performance in first-half 2001. Additionally, though price differentials between heavy and light and between sour and sweet crude oils are now attractively very wide, a correction to more normal but still supportive differentials could evolve if OPEC cuts heavy crude production in 2001 to support oil prices.

The ratings will be reevaluated in first-half 2001. They are sensitive to 4Q00 and first-half 2001 performance and PRG's ability to begin reducing net debt to levels compatible with PRG's mid-cycle potential and down-cycle environments. Premcor's ability to sustain net debt reduction likely requires 4Q00 and 2001 results above seasonal averages, and working capital needs not consuming excessive liquidity. If PRG is not sustaining net debt reduction, a review for downgrade is likely unless Blackstone declares support for Premcor's debt and presents an exit strategy that strengthens Premcor's credit standing. The ratings are not compatible with any strategies that might reduce the claims of the rated instruments to below original par value.

A review would assess: PRG cash flow, liquidity, capex needs, and deleveraging prospects; PACC's progress; combined Port Arthur and PACC performance; extent to which PACC indirectly or Blackstone directly may firm PRG's standing; and if PACC debt is sufficiently insulated from Premcor substantive consolidation, hold-out, and contract renegotiation risk.

RATING SUPPORT:

The ratings remain supported by: (1) PACC's imminent mechanical completion roughly on budget, (2) cash benefits of a sector recovery from March 2000 through November 2000, leaving Premcor with $266 million of 9/30/00 consolidated cash ($38.5 million at PUSA) prior to the winter season and inventory build before the summer season, (3) about $250 million to $270 million of expected year-end 2000 cash, (4) potential substantial annual PACC debt reduction starting in 2001 under PACC's base case scenario, and (5) PRG's view that its own Port Arthur (PA) margins may be somewhat less volatile after PACC's commissioning. Also, while a fall in crude oil prices tends to spur sector inventory building and lower margins, the reduction in crude oil prices would also free up a layer of liquidity cash tied up in inventory.

Purvin & Gertz' base case model indicates PACC's ability to repay about $174 million of debt in 2001-2002, $254 million in 2001-2003, while fully-funding the senior claim of the $75 million PMI reserve account. However, these numbers are not sensitized for operating rates and market forces that can substantially cut cash flow. If realized, base case debt paydown indirectly benefits Premcor to the degree Blackstone remains committed to sustaining PRG's health to optimize the value of its exit strategy. Blackstone's self interest may induce it to provide PRG an increment of downcycle support if it also believed that the assistance could be recovered during an up-cycle or from its exit strategy. Premcor, Inc. and PACC are together one of Blackstone's largest investments.

PRG believes its margin volatility may modestly decline due to substitution of a significant portion of PRG's current Port Arthur exposure to Gulf Coast 3-2-1 crack spreads (based on light sweet crude) with an effectively partially hedged exposure to PACC's eight year coker gross margin stabilization contract with PMI/PEMEX (Baa3). PACC's earnings volatility, and with a lagged effect, its cash flows, are moderated by the PMI margin contract. PEMEX guarantees an average $15/barrel margin between the light products produced by PACC's coker (raw feedstocks for gasoline and distillate) and PACC's coker feedstock (vacuum distillation tower bottoms). Some of this benefit is contractually passed on to PRG through a web of intercompany lease, processing, off-take, and management contracts.

PACC's AMENDED BANK FACILITIES AND CASH FLOW FORECAST:

PACC's bank loans and working capital insurance facility have been amended and increased, and Purvin & Gertz revised its base case cash flow forecast for PACC. The secured revolver was increased from $35 million to $50 million, mandatory term loan repayments were reduced, and Winterthur's letter of credit guarantee facility was increased from $150 million to $200 million. PG forecasts PACC's first five years of base case cash flow available for debt service of $913.4 million (only slightly lower than planned) and $1.338 billion in its first eight years (5% below plan). But PG now expects $232 million of 2001 PACC cash flow available for debt service, about $27 million higher than planned. Still, PACC now likely needs to pre-fund its $75 million coker margin reserve account earlier than planned due to strong heavy/light differentials. These changes result in about a $55 million reduction in PACC's first three years of debt repayment, causing full repayment of the bank facilities to be delayed by about one year until late 2004.

Cash flow revisions result from high absolute oil prices, high natural gas refinery fuel costs, high working capital and letter of credit needs due to high oil costs, and very wide heavy/light crude differentials forcing accelerated pre-funding of PACC's coker margin reserve account.

PACC's RATINGS ARE TIED TO PREMCOR's:

PACC's ratings remain directly tied to Premcor's. This reflects: (1) functionally inseparable PRG/PACC operations and economics; (2) PACC reliance on contractual access to vital PRG units for distillation of PACC's crude oil and the finishing of PACC raw product; (3) material damage to PACC fair value and asset coverage of PACC debt if PRG defaulted; (4) the potential for PRG to seek relief on important processing contracts with PACC if PRG fell into bankruptcy; (5) PACC initially high debt relative to much reduced cash flow and asset value if PACC had to operate or be sold in its defined "Stand-alone" mode (worse if it lost access to the distillation towers), (6) a risk PACC could be rolled-up in substantive consolidation with Premcor if Premcor went bankrupt; and (7) the Premcor securities' likely strength in distress negotiations concerning disposition of PRG, the Port Arthur refinery, PACC contracts, and PACC itself. PACC cannot be sold for fair value unless it operates, and is sold, in tandem with Port Arthur.

UP-DATE SINCE FEBRUARY 2000 RATINGS CONFIRMATION:

In February 2000, after disastrous 1999 sector conditions, Moody's confirmed Premcor's and PACC's ratings with a negative outlook. This action recognized cyclical risks to highly leveraged refiners, but also recognized strong demand and inventory fundamentals, the role backwardation could play in reinforcing tight inventories and good margins, and anticipated strong 2000 and supportive 2001 sector margins. The sector did deliver the strongest margins in six years and record margins in some regions, led by gasoline and marked by exceptionally wide crack spreads and light/heavy and sweet/sour crude oil price differentials. Margins also benefited from reduced fungibility of gasoline grades due to differing regional and seasonal environmental standards for gasoline content. Yet, especially in 3Q00, PRG's margins, cash flow, and cash accumulation did not fully participate in sector strength.

Moody's is somewhat more cautious now about the refining outlook. Furthermore, peak margin environments of the 2000 variety are rare, and Premcor's underperformance caused it to miss a valuable layer of up-cycle cash accumulation. Premcor substantially underperformed strong Midwest sector margins and its relative Midwest performance seems to have worsened after PRG's mid-1998 acquisition of the Lima refinery.

PRG margins were dampened by: very high natural gas fuel costs (over $45 million impact for 2000); low to negative refining by-product margins on residual fuel oil, coke, petrochemical feedstocks, and sulfur; higher than normal byproduct volumes ($100 million impact) due to PRG's heavier than normal Port Arthur crude runs in preparing for PACC start-up; higher than budgeted crude oil freight costs; periodic crude oil pipeline supply constraints into the Midwest; cash hedging and inventory losses due to high, volatile, and backwardated oil prices; and working capital and letter of credit needs inflated by high oil prices. Unscheduled downtime at Blue Island, Lima, and Port Arthur added to unbudgeted costs, lost earnings, and hedging losses.

Moody's is cautious about winter margins. Crude inventories are not as tight (particularly offshore), crude prices may face supply pressure, and gasoline margins substantially tapered off since October. Gulf Coast 3-2-1 crack spreads remain well above disastrous 1999 levels, but they are now largely supported by very strong distillate margins still vulnerable to unknown 2000/2001 winter weather severity and heating oil demand, and uncertainty regarding the actual tightness of heating oil inventories. Primary inventories are tight, but it is not yet clear to what degree this may offset by ample secondary and tertiary inventories. On the other hand, heating oil prices may gain some support from extraordinarily high natural gas prices.

Regarding 2001 margins, Moody's anticipates average sector crack spreads due to concerns about decelerating demand and rising crude oil and gasoline inventory. Falling oil prices have historically prompted inventory building and product price pressure. Still, Port Arthur's margins will also benefit from wide light/heavy and sweet/sour crude oil price differentials on the portion of heavy crude runs not covered by the PMI margin support contract.

LIQUIDITY AND DEBT CAPACITY:

In PG's base case model, PACC generates an average of $200 per year in EBITDA and its original backcast forecast displayed substantial swings around that number. Moody's believes PRG's EBITDA at mid-cycle crack spreads, crude prices, and natural gas costs could be $150 million to $175 million. PACC is not expected to upstream cash to PI for at least two years, but it may be able to pay dividends by 2003 according to PG's base case. Rapid PACC deleveraging may also induce Blackstone to justify a degree of incremental support for PRG until PACC cash flow is available to PI and, hopefully, is made available to PUSA/PRG.

In the meantime, Premcor and consolidated Premcor/PACC carry very high debt relative to PRG and PRG/PACC processing capacity; likely asset value; cash flow volatility; severity of sector corrections; PRG's pattern of untimely downtime; liquidity and letter of credit needs; and impact of backwardated and volatile oil prices on inventory and hedging losses.

While it remains highly leveraged, Moody's believes PRG needs consolidated Premcor cash of around $250 million given that cash is consumed rapidly when weak margins coincide with crude oil price surges during peak seasonal inventory build-up, PRG needs to maintain bank confidence for $700 million of letter of credit capacity, and that about $120 million in cash is ear-marked for letter of credit backup and $40 million is PUSA cash for coupon payments. An oil price surge would consume more letter of credit capacity. About $600 million of letters of credit are issued and $75 million in cash must be pledged to use the full $700 million credit line.

DEBT RELATIVE TO ASSET VALUE AND PROCESSING CAPACITY:

Rapid PACC deleveraging and sound Premcor liquidity are important to bridging the Premcor group to sustainable debt levels. Consolidated Premcor and PACC debt is high relative to processing capacity and asset value ranges. Pro-forma for PACC's $580 million of peak debt, combined PUSA/PRG/PACC debt of $1.555 billion is $2,752 of debt for each of PRG's 565,000 bpd of distillation capacity and over $260 per daily complexity barrel. Adding PUSA's $88 million of preferred stock yields $2,908 of claims per PRG distillation barrel and about $280 per complexity barrel. Such levels exceed the pro-forma value of PRG's four refineries, especially considering the range of values for the smaller landlocked Midwestern units.

In contrast, PRG bought its 170,000 barrel per day Lima, Ohio refinery in 1998 for about $1,090 per distillation barrel and $125 per complexity barrel, and, in Moody's opinion, Blue Island and Hartford likely are less valuable than that. In 1995, PRG bought Port Arthur for $70 million or about $300 per distillation barrel and under $35 per complexity barrel.

Transaction prices rose since PRG bought Lima and Port Arthur. In 2000, a world scale 250,000 bpd light sweet medium complexity refinery built in 1971 on the Gulf Coast sold for $2,640 per distillation barrel and about $284 per complexity barrel. A 295,000 bpd world scale inland refinery in Illinois sold for $1,424 per distillation barrel and about $151 per complexity barrel. In high-margin California, a high complexity 168,000 bpd refinery sold for $3,900 per distillation barrel, around $300 per complexity barrel, and $150 million of performance based compensation. A second very complex 135,000 bpd unit sold for around an extraordinary $5,800 per distillation barrel, $4,750 per throughput barrel, and around $400 per complexity barrel. In 1993-1997, the peak price for California refineries was in 1997, at $2,000 per distillation barrel and $164 per complexity barrel. The average price nationwide was $842 per distillation barrel and $79 per complexity barrel, and would be much lower if California sales are excluded.

Excluding PUSA debt, pro-forma PACC/PRG debt is $2,440 of debt per PRG distillation barrel and about $236 per complexity barrel. Excluding PACC's debt and conversion units, PUSA/PRG debt is $1,725 million of debt per distillation barrel and about $167 per complexity barrel, and debt plus preferred stock is $1,873 per distillation barrel and $181 per complexity barrel. PRG's debt is $1,416 of debt per distillation barrel and $137 per complexity barrel.

The 250,000 barrels per day complex PA/PACC refinery is by far PRG's most valuable unit. If $315 million of Premcor/PACC's $1.555 billion of debt is assigned to Lima, Blue Island, and Hartford's 315,000 barrels of low to medium complexity capacity, the remaining debt represents $4,960 of debt per Port Arthur distillation barrel and $415 to $475 per complexity barrel depending on the pro-forma complexity rating given to Port Arthur.

PACC's IMPORTANCE TO PREMCOR AND BLACKSTONE:

Successful PACC performance may directly assist Premcor's deleveraging after two years to the degree (1) PACC has free cash flow after taxes, capex, debt reduction, and PMI reserve funding, (2) that cash can be upstreamed to PI, and (3) Blackstone downstreams those funds to PUSA.

The optimal, if not only, manner in which Blackstone can maximize the recapture of its PACC investment is an exit strategy including a solvent PRG and a combined Port Arthur refinery and PACC project. PACC's fair value would be hurt substantially if it could not be sold in tandem with its host refinery. Additionally, PI could not be taken public if PRG was not financially sound. But Moody's would not be optimistic for material Blackstone support if a down cycle arrives prematurely or if PRG or PACC suffers material operating problems.

Premcor Refining Financial Update:

The 2000 recovery displayed wide monthly margin swings and regional disparities. On average, Port Arthur realizes margins above Gulf Coast crack spreads but the Midwest units realize a substantial discount (that widened after Lima was purchased) to Midwest margins. In 3Q00 and nine-months 2000, PRG's margins were 55% and 78% of Midwest margins, respectively. Its 3Q00 Midwest margins were only $2.78/barrel but were $4.64/barrel for the first three quarters.

Premcor EBITDA before all inventory timing adjustments was $46 million in 3Q00 and $228 million for the first nine months of 2000. But, after $34 million of 3Q00 cash inventory and hedging losses, EBITDA was only $12 million. In the first three quarters of 2000, after $98 million in cash losses, EBITDA was $130 million. Moody's anticipates 2000 EBITDA in the range of $150 million to $165 million after cash losses, assuming normal 4Q downtime. Moody's believes mandatory annual capex may average $100 million while PUSA/PRG gross interest expense is about $100 million a year. Total capex may be in the range of $170 million for 2000 and $130 million for 2001.

Cash balances benefit from $124 million in 3Q00 working capital reduction after a $90 million 2Q00 working capital increase, and from PRG's 1998 $215 million sale of its retail network. Consolidated 9/30/00 cash was $266 million and may end the year around $250 million to $270 million. PUSA's 9/30/00 net worth was $34 million and PRG's was $245 million. Combined PUSA and PRG debt was $970 million ($175 million at PUSA). PUSA also accretes dividends on its 11.5% cumulative PIK preferred shares, with a current face value of $88 million.

PACC PROJECT UPDATE:

Construction was 96% complete by November. Most of the $48 million contingency cushion is scheduled to be spent, but Premcor believes costs will stay within the $853 million budget. Remaining outlays are startup costs, including catalysts, and new costs if startup problems occur. Initial testing of the coker heaters was delayed. Initial operation of the hydrocracker is planned for the third week of December and the desulfurization units are operating. Air Products and Chemicals (APC) achieved mechanical completion of the hydrogen plant.

Mechanical completion is delayed by one month and is expected for the third week of December. Moody's would not be surprised if the formal commencement of commissioning does not begin until January. After Foster Wheeler declares mechanical completion, Premcor and independent engineer Purvin & Gertz have ten days to concur. PACC has been testing the coker with 50,000 to 60,000 bpd of vacuum tower bottom runs through the coker.

PACC 9/30/00 debt was $498 million, reportedly peaking around $580 million during commissioning. PG now projects 2001 PACC base case cash flow available for debt service of $232 million and interest of $64 million and $186 million and $55 million, respectively, in 2002. PACC's base case shows $107 million of debt paydown in 2001 ($99 million by cash sweep), $75 million in 2002, $103 million in 2003, and $10 million in 2004 after funding the PMI reserve account. PG's base case model shows PACC EBITDA averaging $200 million annually.

PACC debt reduction by cash sweep will be slower than planned if crude oil price differentials stay wider than the $5.94/barrel differential implicit (on historical prices) in PACC's PMI coker margin support agreement. Wide differentials between heavy and light and between sour and sweet crude oil enhance PACC's natural coker margins. But its margin volatility will be moderated by the coker margin stabilization agreement, and the contract requires pre-funding of the margin guarantee reserve account, to a $75 million maximum, when coker margins are wider than $15/barrel. These payments are senior to the bank's cash sweep mechanism.

DESCRIPTION OF PACC PROJECT, ASSETS, AND CONTRACTS:

The PACC project includes PACC-owned deep conversion and desulfurization units, key assets PACC leases from PRG, and key contracts amongst PACC, PRG, and third parties. PAF funds the debt portion of PACC's $715 million share of PRG's $835 million coker project, situated within PRG's Port Arthur, Texas refinery. Including a vital hydrogen plant built and owned by Air Products and Chemicals (APC), the total project cost is $960 million. The project is should enhance PA's margins by enabling it to run a far higher proportion of cheaper heavy sour crude (mostly Mexican Maya) without reducing PA's combined 80% yield per barrel of high value gasoline and distillate or materially increasing its low or negative value heavy products yield.

Principal assets and contracts: (1) PACC's lease of 100% of PA's distillation capacity and associated hydrotreaters. (2) A PRG-funded expansion of PA's atmospheric distillation capacity from 232,000 bpd to 250,000 bpd and vacuum distillation capacity from 85,000 bpd to 131,000 bpd. PRG also revamped PA's hydrotreaters and other offsite units. (3) PACC's construction of an 80,000 bpd delayed coker, 35,000 bpd vacuum gas oil hydrocracker, and a 417 long tons/day desulfurization complex. (4) PRG's assignment of the key PEMEX crude supply and coker margin support contract to PACC. (5) The $544 million lump sum project design, engineering, and construction contracts with Foster Wheeler. (6) The take-and-pay (if delivered) hydrogen supply agreement with APC. (7) PRG conducts PACC's construction and will source all of PACC's crude oil and buy all of PACC's production under a portfolio of processing, management, and off-take contracts.

PREMCOR REFINING UNITS:

PRG operates four refineries with combined distillation capacity of 565,000 bpd. The currently light sour 250,000 bpd Port Arthur refinery located at Port Arthur, Texas is PACC's host and will become a heavy sour unit after PACC commissioning. A 170,000 bpd light sweet refinery is located in Lima, Ohio, an 80,000 bpd light sweet refinery is in Blue Island, Illinois, and a 65,000 bpd heavy sour refinery is in Hartford, Illinois. Port Arthur has ready access to waterborne crude oil but the land-locked Midwestern units occasionally face crude pipeline constraints.

The Premcor Refining Group, formerly Clark Refining & Marketing, is headquartered in St. Louis, Missouri.

New York
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Andrew Oram
V.P. - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.

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Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody's Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody's investors Service also maintain policies and procedures to address the independence of Moody's Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody's Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."

Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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