Midstream Rating Methodology

Question 1

What are three key factors that are important in our assessments for ratings in the midstream energy sector?

Answer 1

1. Scale (30%)
2. Business Risk (30%)
3. Financial Leverage & Distribution Profile (40%)

Question 2

What do midstream companies do?

Answer 2

handle crude oil, petroleum products, natural gas and natural gas liquids in various types of gathering, treating, transportation and storage and terminaling facilities.

Question 3

Where do midstream companies typically rate?

Answer 3

atings of the covered issuers range from A2 to B3 with a concentration in the Baa2 and Ba3 rating categories. The median rating for the midstream companies is Ba1.

Question 4

What subfactors are considered when assessing the scale rating of a midstream company?

Answer 4

1. Property, Plant and Equipment (PP&E) and

2. EBITDA

Question 5

What subfactors are considered when assessing the Business Risk rating of a midstream company?

Answer 5

Estimated Price and Volume Risk Exposure

Question 6

What subfactors are considered when assessing the Financial Leverage and Distribution Profile

Answer 6

EBITDA / Interest Expense
Debt / EBITDA
(FFO - Maintenance Capex ) / Distributions

Question 7

Why does scale matter when assessing midstream companies?

Answer 7

A larger scale implies:

1) a platform for sustainable earnings and cash flows and can also have a positive effect on a company’s relative market position.
2) Economies of scale could be derived from wider spreading of resources and cheaper supply procurement.
3) A diverse spread of midstream assets can have a positive portfolio benefit for a midstream company’s ratings, as risk profiles and supply and demand dynamics can vary by business line and geographic region.

Question 8

Why is PP&E a better indicator of long term hard asset coverage than total assets?

Answer 8

We believe PP&E is a better indicator of long term debt coverage than total assets, which can be inflated by significant working capital assets, such as from marketing operations, including back-to-back buy/sell arrangements, or from significant intangible assets, such as goodwill.

Question 9

What are the key factors when assessing business risk?

Answer 9

Exposure to price and volume risk

Question 10

Why is financial leverage an important rating consideration?

Answer 10

Financial leverage and distribution profile can provide an indication as to how well a company might cope through periods of industry weakness, its capacity to incur additional debt and its balance sheet flexibility. Financial flexibility is crucial for midstream MLPs due to their heavy reliance on the capital markets

Question 11

What 3 ratios do moody’s use to assess financial leverage for midstream companies?

Answer 11

We look at three ratios: 1) interest coverage (EBITDA / Interest), 2) leverage (Debt / EBITDA) and 3) distribution coverage (FFO - Maintenance Capex / Distributions). We believe that the amount of leverage with which management operates and its dividend payout