October 4, 2008 at 2:21 pm #3396
Fitch Revises HOVENSA’s Outlook to Negative; Senior Secured Affirmed at ‘BBB’
Friday October 3, 3:31 pm ET
NEW YORK–(BUSINESS WIRE)—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.
Sam Kamath, 212-908-0552 (New York)
Adam Miller, 312-368-3113 (Chicago)
Tyrene Frederick-Mack, 212-908-0540
(Media Relations, New York)
October 4, 2008 at 2:25 pm #6531
Here is update on Hovensa (Hess & PDVSA JV) Outlook revision & potential future Credit Rating risks that is sign of issues to come for PDVSA supplied refineries as well as PDVSA given the trend of oil prices away from speculative prices and back to fundamentals. And because of the downward trend in product prices as function of the demand destruction that has occurred with the long period of high prices.
I would not be suprised to find Hovensa on PDVSA’s sale block as price crude falls and puts even more pressure on revenue for both oil companies.
Hovensa also has the increased capital/debt cost hit from PRI (Petroleum Refinery Initiative) from meeting the EPA CFP (Clean Fuel Program) to meet products low sulfur requirements as did the rest of US Refineries (with little payout despite environmental claims of potential higher product value).
And additional burden comes from the dependence on crude from CSA (Crude supply agreements) for Merey & Mesa Crudes from PDVSA – Hovensa’s other 50% owner and its credit risk due large expense of social spending tapping revenue in much the same manner that social revenue has exacted from huge tolls on Mexico’s Pemex Refining sector. While Merey and Mesa are Lt. Heavy Conventional Crudes they are not in the same cost advantage as blended bitumen or syncrudes that other Caribbean & USGC refineries can process.
Another burden has been the high cost of its self generated electricity cost of cogens using multiple fuels from Refinery Gas to VGO (Vacuum Gas Oil). The only upside from falling crack spreads is that the falling price of products will also mean lower cost for these intermediate product fuels & electricity.
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