
Joel R. Glucksman
Partner
201-896-7095 jglucksman@sh-law.comFirm Insights
Author: Joel R. Glucksman
Date: October 13, 2015

Partner
201-896-7095 jglucksman@sh-law.comOn Sept. 15, Hovensa LLC, once one of the world’s largest oil refineries , announced that it had filed for Chapter 11 bankruptcy protection, according to a CNBC report. In court papers, the company cited poor economic conditions and increased competition for its slide into insolvency.
The company, a joint venture between Petróleos de Venezuela, the national oil company of Venezuela, and Hess Corp., had witnessed a significant decline in recent years, which led to its closing in 2012. According to company officials, their remote location in the U.S. Virgin Islands, the plant’s antiquated energy infrastructure, and the company’s high operating costs, all led to their balance sheet being saddled with massive debt.
In its bankruptcy documents, the company listed more than $1.3 billion in liabilities and assets between $100 million and $500 million, with roughly $750,000 in cash on hand. According to the Wall Street Journal, the company’s remaining assets include the oil refinery, 2,000 acres of commercial property, storage and distribution facilities, various equipment and land permits and rights.
Prior to its bankruptcy filing, the company had operated solely as a storage facility and fuel importer for the Virgin Islands, despite the fact that the refinery has not been operable since 2012. Following the litigation costs and the inoperability of the refinery, Hovensa decided to seek bankruptcy protection because it owes Hess Corp. and Petróleos de Venezuela $1.86 billion.
On the same day it filed for Chapter 11 bankruptcy, Hovensa announced that the Virgin Islands government had filed a lawsuit against the company. In the lawsuit, the Virgin Islands government stated that it sought 100 percent of returns from over $6.5 billion in tax exemptions and incentives it provided to Hovensa from 1965 to 2015.
This lawsuit followed a rash of litigation in which the company was involved. Previously, the Virgin Islands government sued Hess Corp. under the Virgin Islands’ Criminally Influenced and Corrupt Organizations Act for more than $1.5 billion for shuttering the refinery. The Virgin Islands government claimed in the lawsuit that Hess Corp. exhibited a “pattern of misconduct”, alleging that the company began liquidation of its assets in order to leave the government with the debt.
Earlier this year, the Virgin Islands Bureau of Internal Revenue filed a grievance against Hess Corp. and Petróleos de Venezuela alleging that the partners owed approximately $3.8 billion in taxes and penalties related to the Hovensa refinery.
Hess responded to the claims with a countersuit against the Virgin Islands government seeking an $84 million tax refund for payments made on the Hovensa refinery. However, that case was later thrown out by the U.S. District Judge J. Paul Oetken.
As part of its reorganization plan, Hovensa agreed to sell its refinery and storage facilities to Limetree Bay Holdings LLC for $184 million. In the sale agreement, that is subject to court approval, Limetree would take on a portion of Hovensa’s debt load, which is estimated to be ten times more than the acquisition price. Approximately $40 million in proceeds from the proposed sale will be paid to the Virgin Islands government as part of a claim against Hovensa for natural resource damage.
According to court documents, Hovensa stated that the offer by Limetree Bay will be subject to higher bids at a bankruptcy court auction. These bids are subject to court approval.
In a separate filing, Hess Corp. and Petróleos de Venezuela would provide $40 million in bankruptcy financing to ensure that the company maintained operations during the bankruptcy period. The company’s goal is to re-emerge from the bankruptcy process as a viable oil refinery with a fresh influx of capital to sustain operations.
The reorganization plan will also require an operating agreement to be reached with the Virgin Islands government.
According to company officials, upon re-opening the refinery, Hovensa will supply 15 million barrels of crude oil and various refined products to market, in addition to operating as a storage facility. Hovensa cited the fact that there is a shortage of crude oil storage facilities in the Caribbean, which positions the company to grab a substantial share of the market upon re-opening operations.
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