S&P, WRI Release Report on Climate Policy Scenarios and the US Chemicals Industry

Government actions to reduce greenhouse gas (GHG) emissions would have a modest credit impact on most subsectors of the U.S. chemicals industry, according to a new analysis released today by Standard & Poor’s Ratings Services (S&P), the world's foremost provider of credit ratings, and the World Resources Institute (WRI), a leading global environmental think tank.

The 36-page study-- How U.S. Federal Climate Policy Could Affect Chemicals’ Credit Risk – examines how climate change policy drivers could be incorporated into the evaluation of credit quality. It analyzes two types of federal climate policy scenarios – (1) a market-based GHG emissions reduction policy (“cap-and-trade”) as approximated by the American Power Act (APA), and (2) Environmental Protection Agency (EPA) regulation of greenhouse gas emissions (GHG) – in the context of 13 energy-intensive chemicals subsectors. These 13 subsectors account for almost 90 percent of the US chemicals industry’s emissions, which in turn contribute to about 5 percent of total U.S. emissions. The report also includes two case studies detailing credit impacts on two hypothetical chemicals companies.

“Credit quality is directly related to oil and natural gas inputs and related raw materials, and policy impacts will largely depend on a company’s product mix, energy use, and GHG emissions,” said Kyle Loughlin, managing director and credit analyst at Standard & Poor’s Ratings Services. “While most subsectors would face only modest incremental risk under the APA legislative framework, energy-intensive chemical producers may have limited ability to pass along costs, depending on market conditions. This could make some energy- and emissions-intensive companies less competitive and ultimately weaken credit metrics.”

“This report will inform analysts and investors about the influence of emerging climate policies on credit quality” said Kirsty Jenkinson, Head of WRI’s Markets & Enterprise Program, “Companies that act now to improve their energy efficiency and reduce emissions are likely to gain a ‘first-movers’ advantage in a GHG-constrained economy.”

Among the key findings of the report:

Under the APA-based legislative (“cap-and-trade”) scenarios analyzed:

• Most chemicals subsectors analyzed experienced only modest costs related to the purchase of fuel and feedstocks and compliance with GHG permitting requirements.

• 10 of the 13 GHG-intensive subsectors analyzed faced limited compliance risk due to free GHG permits provided by the APA.

• U.S. specialty chemicals companies tend to be less GHG-intensive. As a result, any future climate change policy is less likely to significantly affect their credit quality.

Under the EPA regulatory scenarios analyzed:

• Petrochemicals, other basic organic chemicals, and nitrogenous fertilizer producers are likely to be regulated due to their high absolute emissions and potential to significantly reduce these emissions.

• Companies with older, less efficient facilities are likely to experience credit impacts as they expend more capital to achieve best-practice standards.

S&P’s involvement in this commentary, to which it provided its separate and independent input, reflects its credit risk analysis experience in the U.S. chemicals sector as well as its intention to enhance its knowledge of carbon exposure risk potentially faced by corporates depending on future legislative and policy developments.

Peter Jadrosich, Global Head of Credit Research at APG, the Dutch pension asset manager, which provided financial support for WRI’s analysis, said, “At APG, we are increasingly looking to integrate environmental factors into our fixed income investment decisions. This report is the first of its kind due to its unique focus on credit quality.”

The full report is available for download at:

S&P: http://www.standardandpoors.com (Click on Press Release under “About Us” section, lower right on home page); and

WRI: http://www.wri.org/publication/how-us-federal-climate-policy-could-affect-chemicals-credit-risk

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For further information or to request a full copy of the report which outlines the assumptions used in the analysis, please contact:

S&P: Mimi Barker, Director, Communications, mimi_barker@sandp.com, (212) 438-5054

WRI: Michael Oko, Director of Media Relations, moko@wri.org, (202) 729-7684; (202) 246-9269

About Standard & Poor’s
Standard & Poor's, a part of The McGraw-Hill Companies (NYSE:MHP), is the world's foremost provider of credit ratings. With offices in 23 countries, Standard & Poor's is an important part of the world's financial infrastructure and has played a leading role for 150 years in providing investors with information and independent benchmarks for their investment and financial decisions. For more information, visit http://www.standardandpoors.com

About WRI
The World Resources Institute (www.wri.org) is a global environmental think tank that goes beyond research to put ideas into action. We work with governments, companies, and civil society to build solutions to urgent environmental challenges.

About APG
APG provides asset management services for pension funds. With assets under management of approximately €265 billion (as at 30 September 2010), APG is one of the world's largest pension asset managers and has a strong commitment to responsible investment. APG does not offer investment advisory services to U.S. persons. (www.apggroup.com)