CORRAL PETROLEUM HOLDINGS AB (PUBL) - Preem

Restrictions on transfers of fundsWe are a holding company. As a holding company, to meet our debt service and other obligations, we aredependent upon equity contributions from our parent company, Moroncha Holdings, or its shareholder, dividends,permitted repayment of intercompany debt, if any, and other transfers of funds from Preem. Substantially all of ourpresent assets consist of 100% of the share capital of Preem.Since the 2006 Credit Facility, Preem has not been permitted to expend any cash, declare any dividends orotherwise transfer any funds to us, except that it may do so provided it maintains certain financial ratios and repays orprepays specified amounts. These restrictions remain in the 2008 Credit Facility. Under the 2008 Credit Facility, Preemobtained an additional right to declare and pay dividends or lend money to us, at any time on or prior to April 15, 2010,up to the maximum of $130 million over the life of the 2008 Credit Facility; or administrative costs up to a maximum of$500,000 in any calendar year. However, this additional right was removed upon the effective date of the SecondSupplemental Agreement for the term of the 2008 Credit Facility. Additional restrictions on the distribution of cash to usarise from, among other things, applicable corporate and other laws and regulations and by the terms of other agreementsto which Preem is or may become subject. Under Swedish law, Preem may only pay a dividend to the extent that it hassufficient distributable equity according to its adopted balance sheet in its latest annual report; provided, however, thatany distribution of equity may not be made in any amount which, considering the requirements on the size of its equity inview of the nature, scope and risks of the business as well as the financing needs of Preem or the group, including theneed for consolidation, liquidity or financial position of Preem and the group, would not be defendable.As a result of the above, our ability to service cash interest payments or other cash needs is considerablyrestricted. Currently, Preem would not be permitted to pay a dividend and it is unlikely that this situation will changesignificantly.Quantitative and Qualitative Disclosures about Market RiskOur primary market risk exposures are commodity price risk, foreign currency risk and interest rate risk.Commodity Price RiskChanges in the price of commodities, such as crude oil, can affect our cost of goods sold and the price of ourrefined products. Commodity price changes can trigger a price effect on inventory, which can affect our revenues, grossprofit and operating income. Our inventory management strategies include the purchase and sale of exchange-traded, oilrelatedfutures and options with a duration of twelve months or less. To a lesser extent, we also use oil swap agreementssimilar to those traded on international exchanges such as the Intercontinental Exchange, including “crack” spreads(which are intercommodity spreads based on the difference between the price of a refined product and crude oil) orintercommodity spreads, and options that, because they contain certain terms, such as point of delivery, customized to themarket in which we sell, are better suited to hedge against the specific price movements in our markets. The number ofbarrels of crude oil and refined products covered by such contracts varies from time to time. Nevertheless, we seek tomaintain our “normal position” of crude oil, finished products and intermediates. Our “normal position,” which is1,840,000 cubic meters (approximately 12 million barrels), is evaluated based on the average optimal inventory level inour depot system, the required inventory levels to allow for continuous flow and operations and the amount of crude oiland products that are priced, but not delivered. When the volume in our inventories deviates from the normal position,both above and below, we have used and will seek to use derivatives to restore the volume that is exposed to pricefluctuations. These strategies are designed to minimize, on a short-term basis, our exposure to the risk of fluctuations incrude oil prices and refined product margins. This hedging activity is closely managed and subject to internallyestablished risk standards. The results of these hedging activities are recognized in our financial statements asadjustments to cost of goods sold.Fluctuations in the price of crude oil were significant during 2008. Based on data from Platts, the price of DatedBrent crude oil was approximately $97 per barrel at the start of the year and ended at approximately $37 per barrel. In2008, the price of Dated Brent crude oil increased significantly in the first and second quarters, peaking at approximately$144 per barrel in the beginning of the third quarter. However, the price of Dated Brent crude oil declined significantlyduring the third and fourth quarters of 2008, reaching a low of approximately $34 per barrel and ending the year atapproximately $37 per barrel. As of December 31, 2009, Dated Brent crude oil prices increased to approximately $78per barrel. As of December 31, 2010, Dated Brent crude oil prices increased to approximately $93 per barrel.Our revenues and cash flows, as well as estimates of future cash flows are sensitive to changes in oil prices.Major shifts in the cost of crude oil and the price of refined products can result in significant changes in the operatingmargin from refining operations. The prices also determine the value of our inventory.We enter into commodity derivative contracts from time to time to manage our price exposure to our inventorypositions and our purchases of crude oil in the refining process, and to fix margins on certain future production. Thecommodity derivative contracts may take the form of futures contracts or price swaps and are entered into with reputablecounter-parties. Derivative contracts are marked to market with gains and losses, realized and unrealized, recognized incost of goods sold.29