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Fitch Revises HOVENSA's Outlook to Negative; Senior Secured Affirmed at 'BBB'

NEW YORK-(Business Wire)-October 3, 2008 - Fitch Ratings has affirmed HOVENSA LLC's senior secured debt rating of 'BBB' and revised its Rating Outlook to Negative. The rating affirmation applies to the following debt issuances and facilities:

—$400 million senior secured bank revolver due 2012 'BBB';

—$126.8 million of senior secured tax-exempt bonds due 2021 (series 2002) 'BBB';

—$74.2 million of senior secured tax-exempt bonds due 2022 (series 2003) 'BBB';

—$50.7 million of senior secured tax-exempt bonds due 2022 (series 2004) 'BBB';

—$104.1 million of senior secured tax-exempt revenue bonds due 2022 (series 2007) 'BBB'.

The Negative Rating Outlook reflects the potential for sizable capital expenditures in connection with the EPA's petroleum refinery initiative (PRI) over the near- and medium-term and expectations of rising debt levels. Additional concerns affecting the credit quality at HOVENSA include expectations for crack spreads to remain below historical levels, higher fuel expenses, and continued pressure on sponsor distributions, particularly from Petroleos de Venezuela, S.A (PDVSA), as its credit quality remains under pressure while it continues to support social spending in Venezuela.

As of first-half 2008 (1H08), liquidity remains strong at HOVENSA with an estimated $537 million of cash and the full $400 million available under the company's secured bank revolver. That said, the majority of the increase in cash during the first half of the year came from working capital sources and the company actually experienced reduced funds from operations as crack spreads suffered from rising oil prices and reduced product demand in the U.S.

The ratings for the company continue to reflect expectations of strong cash flows in a lower than $100/ barrel environment, low levels of financial leverage (estimated at $712/barrel of refining capacity), expectation of a prudent sponsor distribution policy, and adequate additional indebtedness provisions. However, the ratings also recognize the concentration risk associated with the single refinery to generate cash flows and the reliability of crude supply from Venezuela.

During 1H08, EBITDA levels declined significantly as crack spreads fell from record levels and the company experienced operational issues resulting in shutdown of the catalytic cracker for around 45 days. EBITDA was a modest $12 million compared to $466 million for the full year 2007. Additional drivers for the reduced EBITDA stem from the significant increase in the cost of power generation.

Electrical power is generated with 11 gas turbine cogeneration units and one steam turbine-driven generator within HOVENSA, which represent the only supply of electrical power to the refinery. Total capacity is 240 megawatts (MW), with normal demand of 170 MW. The gas turbines can burn multiple fuels, including refinery fuel gas, LPG, hydro-treated light cycle oil (LCO) and/or vacuum gas oil (VGO). Currently the plant uses roughly 32,000 barrels per day (bpd) to generate electricity and, as the power is generated using crude oil or the byproducts of crude oil, the cost of generation has increased significantly and has been the one of the key reasons for lower cash flow in the first half of 2008.

Although HOVENSA made $100 million in distributions to its sponsors in 2008, Fitch understands that no further distributions are planned for 2008. Any further distributions to the sponsor in the current environment could negatively affect the credit quality of the project.

The Clean Fuel Program (CFP) which was started in 2003 was completed in July 2008 at a cost of $421 million; budgeted cost of the project was $395 million and expected completion was December 2006. CFP consisted of upgrading the plant to accommodate the new regulation set by the EPA; the upgrade was required to refine lower quantity sulfur gasoline (30 'parts per million' or ppm), ultra low sulfur diesel (15 ppm), reduce NOx, and for power distribution and electrical upgrade.

The project remains exposed to PDVSA performance risk with respect to the crude supply agreements (CSA). Although HOVENSA is not solely dependent on PDVSA's crude supply, the project has two CSAs with PDVSA that account for 115,000 bpd of Merey and 155,000 bpd of Mesa crude oil. Hess and HOVENSA, however, have demonstrated ability to source alternative, non-Venezuelan crudes during previous periods of oil production cuts in Venezuela.

HOVENSA is a limited liability company that owns and operates a 500,000 barrels-per-day crude oil refinery in the U.S. Virgin Islands. HOVENSA is indirectly owned 50% by Hess Corporation (Hess) and 50% by PDVSA.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

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