April 5, 2005
Fitch upgrades HOVENSA's senior secured rating to 'BBB'

(BUSINESS WIRE) - "Fitch Ratings has upgraded the senior secured debt ratings of HOVENSA LLC to 'BBB' from 'BBB-'. The upgrade is based on the strong cash flow generation of the refinery, the conservative distribution policy of the Amerada Hess Corporation (Hess) and Petróleos de Venezuela, S.A. (PDVSA; together, the sponsors), the restrictive covenant package in HOVENSA's credit facility and Common Security Agreement, the strong collateral package, and HOVENSA's insurance coverage.

The rating action applies to the company's undrawn $400 million senior secured bank revolver due 2008, $126.8 million of senior secured tax-exempt bonds due 2021 (the series 2002 bonds), $74.2 million of senior secured tax-exempt bonds due 2022 (the series 2003 bonds), and $50.7 million senior secured tax-exempt bonds due 2022 (the series 2004 bonds).

Since financial completion of the coker in August 2002, the refinery has been operating above expectations and continues to generate cash flows in excess of its fixed operating, mandatory capital expenditures, and financial obligations. In 2004, the refinery operated at average throughput rates of 98% for the crude unit and 95% for the coker, generating approximately $612 million of EBITDA and $656 million of cash from operations as the company benefited from strong refining margins and wide light-heavy crude spreads. After $129 million of capital expenditures and $175 million in distributions to the sponsors during the year, HOVENSA ended 2004 with $569 million in cash, including the $12 million debt service reserve account.

During the year, the company paid down the remaining $191 million of its term loan and issued the $50.7 million in tax-exempt bonds due 2022. As a result, balance sheet debt was down to $252 million at year-end 2004 from $392 million at the end of 2003, and debt-to-capitalization was down to 10% from 18%.

The sponsors also continue to limit distributions from HOVENSA to the extent necessary to ensure that the remaining $350 million in capital expenditures associated with the Clean Fuels Program will be funded by HOVENSA's operating cash flow. Given the current strong cash flows and cash balances, Fitch views the distribution of $225 million paid to the partners in February 2005 as modest. Of note is that prior to the $175 million in distributions in 2004, the sponsors had not received any distributions from HOVENSA since forming the joint venture in 1998.

As for structural limitations, HOVENSA requires an affirmation of its investment-grade ratings prior to taking on any additional debt. The company's agreements also call for a mandatory prepayment of any borrowings under the credit facility within 60 days of any distribution.

Distributions are also limited through the common security agreement covenants, including a debt service coverage ratio and a low sulfur capital expenditures ratio. The bondholders also have a significant collateral package, which includes a security interest and lien on all of HOVENSA's physical assets, including the refinery, as well as the borrower's accounts, inventory, accounts receivable, and all agreements except the crude oil supply agreements with Petróleos de Venezuela S.A.'s (PDVSA).