Fitch Ratings Comments on Husky Energy Inc.

Fitch Ratings does not expect the negative revision to Husky Energy Inc.'s (Husky) heavy oil reserves to make an impact on Husky's credit quality. Fitch rates Husky's senior unsecured debt and revolving credit facilities 'BBB+', the company's 8.45% senior secured bonds for the Terra Nova project 'A-' and the company's subordinated unsecured capital securities 'BBB-'. The Rating Outlook is Stable.

With its fourth-quarter 2004 earnings release, Husky reported that the company was taking a negative 120 million barrel revision to its heavy oil reserves before royalties due to the drop in the calculated price of Lloydminster heavy crude oil to C$12.27 per barrel on Dec. 31, 2004, the date on which Husky calculated its reserves. In accordance with U.S. Securities and Exchange Commission (SEC) guidelines, these reserves would have produced negative free cash flow at the wellhead at the Dec. 31 price and, therefore, could not be included in Husky's proven reserves.

While the revision highlights the large discount and high lifting costs for heavy crudes as well as Husky's low reserve life relative to the company's peers, Fitch also recognizes that the negative revision does not reflect the full value of Husky's operations, including the company's 77,000 barrel per day (bpd) upgrader that converts heavy crudes into a light, high-quality synthetic crude. Husky estimates the netback for the upgrader after royalties, lease operating expenses, transportation and upgrading costs would have been approximately C$30 per barrel on Dec. 31, 2004. When incorporating all of the company's heavy oil facilities, which also includes the company's 25,000 bpd asphalt refinery in Lloydminster, the company's heavy oil production was economical on Dec. 31. Excluding the price revision for the heavy reserves, Husky would have replaced approximately 118% of 2004 production organically.

Husky's credit profile remains strong as a large Canadian oil and gas producer with substantial midstream and downstream operations. Husky continues to maintain a strong balance sheet as the company generated EBITDA of approximately C$2.6 billion in 2004 providing interest coverage of nearly 24 times (x), and leverage, as measured by balance sheet debt to EBITDA, of only 0.7x. Total production before royalties totaled 325,000 barrels of oil equivalent per day, a 4 percent increase over 2003. Earnings in 2004 also included the negative impact of the company's significant hedges, which reduced revenues by C$561 million before tax. The company's 85,000 bpd crude oil hedge at US$27.46/bbl ended on Dec. 31, 2004. Year-end 2004 debt totaled approximately $1.88 billion, which excluded any additional borrowings required to pay the company's ordinary and special dividends on Jan. 1, 2005 of approximately C$280 million.

As noted, Husky's reserve life remains a concern at 7.7 years at year-end 2004 (excluding the heavy oil reserve revision). The company's aggressive growth strategy is expected to help turn this trend around, with 2005 capital spending expected to be more than C$2.5 billion, an 8% increase over 2004 spending. Major investments in the 2005 budget include C$1.3 billion for upstream in Western Canada (including C$180 million for exploration), C$460 million for the development of the White Rose project (start-up in late 2005), C$310 million for the 30,000 bpd Tucker Oil Sands project (start-up in the second half of 2006), and C$115 million for the Lloydminster ethanol plant. Due to the significant capital program, Husky would likely be free cash flow negative under Fitch's price deck for 2005 of US$35 for West Texas Intermediate and US$5 for natural gas at the Henry Hub. Fitch recognizes that its price deck is significantly lower than today's spot prices, but also expects Husky's earnings to be stronger in 2005 than 2004, particularly given the end of the crude hedging program in 2004.

Husky's ownership remains concentrated with approximately 72% of Husky's common stock owned by the Hong Kong conglomerate Hutchison Whampoa Ltd. (rated 'A-' with a Negative Outlook by Fitch) and Mr. Li Ka Shing. Although rumors continue to revolve around a potential sale of Husky, any transaction would be evaluated at that time. Management has continued to maintain a very strong balance sheet, which has offset Fitch's concerns with the credit, including the concentrated ownership.

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