Fitch Ratings has affirmed approximately $446 million of outstanding Port of Houston Authority, TX (Port Houston, the authority) unlimited tax bonds at ‘AA’, and affirmed Port Houston’s Issuer Default Rating (IDR) at ‘AA’. The Rating Outlook is Stable.
RATING RATIONALE
The ratings reflect a strong general obligation unlimited tax pledge, which is levied on a sizable and growing base that exhibits minimal taxpayer concentration for the general obligation (GO) bonds. However, despite a very sizable and healthy tax base, the GO rating is constrained by the Authority’s IDR rating of ‘AA’, which considers the revenue generating capacity of port operations. The IDR considers Port Houston’s position as a major maritime gateway for both Texas and the U.S., ranking first in the country in petroleum, steel and project cargo, and sixth in 20-foot equivalent unit (TEU) throughput.
The rating also reflects the Authority’s long-term positive growth trends and stable cargo revenues through economic cycles. Historically, capital improvements have been funded primarily with ad-valorem taxes and excess cash flows from operations; revenue-backed debt provides an additional funding source for capital improvement projects. The rating reflects the port’s expected ability to service both current and anticipated future debt under various sensitivity scenarios at strong coverage levels and low leverage levels that are commensurate with an ‘AA’ rating.
KEY RATING DRIVERS
Strong Port Franchise – Revenue Risk (Volume): High Stronger
Fitch has revised its assessment of Revenue Risk (Volume) to ‘High Stronger’ from ‘Stronger’ following the publication of its new Transportation Infrastructure Rating Criteria, which assesses volume risk on a five-point scale.
Port Houston is one of the nation’s largest maritime ports with numerous terminals and facilities along the Houston Ship Channel. The overall Houston Ship Channel complex ranks first in the U.S. in total tonnage and includes the Authority’s eight public terminals, which handle breakbulk, general and containerized cargo, plus over 200 privately owned docks and facilities. The Authority benefits from proximity to Houston, TX, the fourth largest city in the U.S. and an area which has shown resilience through economic downturns.
Diverse Revenues – Revenue Risk (Price): Stronger
Operating revenues are 93% derived from vessel and cargo services, with the remaining 7% coming from leases and other sources. In the breakbulk portion of the business, the port operates as a landlord with two long-term contracts for the use of dock facilities. With regards to the container side, the port runs the Barbours Cut and Bayport terminals as operator.
Sizable Capital Program – Infrastructure Development/Renewal: Stronger
While existing facilities are in good repair, the Authority’s sizable but manageable capital improvement plan (CIP) calls for approximately $1.08 billion in expenditures for projects from 2022 through 2026. The current capital budget focuses on expansion and ongoing maintenance needs, including retrofitting for Barbours Cut; continued expansion of the Bayport terminal; dredging the channel depth at Barbours Cut and Bayport to 45 feet; and various turning basin, breakbulk and general cargo facility improvements.
With the accelerated completion schedule of the Houston Ship Channel Expansion project, the Authority anticipates issuing additional revenue bonds to fund a portion of its share of costs, which totals an additional approximately $538 million for 2022 through 2026. The Authority will continue to fund projects with cash from operations and will explore various financing alternatives to ensure that they are prepared to fund additional capital improvement projects.
Fully Amortizing, Fixed-Rate Debt – Debt Structure: Stronger
The port has $446 million in rated unlimited tax bonds outstanding, all fixed rate, with final maturity in 2039. Debt service is fully funded from voter-approved ad valorem taxes in Harris County, with no support from port revenues. The assessed valuation of the port’s tax base is sizable at $508 billion in 2021 and has exhibited strong growth, as evidenced by a 6.9% compound growth rate from 2012-2021.
In addition, the port has $317 million in first lien, fixed-rate revenue bonds that were issued in 2021 and are not rated by Fitch. In April 2022, the Authority entered into a new five-year, third lien $300 million extendible commercial note program, in addition to its five-year $100 million note purchase program. To date, no draws have been made on the facilities.
Financial Profile
Financial metrics appear very strong. Following the issuance of the 2021 revenue bonds, net leverage was initially negative when considering the Authority’s available cash balances. In the more conservative rating case which assumes a recessionary downturn in revenues, coupled with full implementation of the CIP and $450 million in additional revenue-backed borrowing in 2023, coverage averages 8.8x. By 2026, leverage still remains low at 2.0x in the rating case.
PEER GROUP
Comparable ports include Ports of Los Angeles and Long Beach (both rated AA). Port Houston compares favorably to both ports, with a higher debt service coverage ratio (DSCR) and slightly lower leverage. While the Authority has lower throughput volumes, there is greater diversification and balance of trade in cargos.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
–Future borrowing for the CIP that increases revenue-backed leverage materially above 6x without corresponding increases to net revenues.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
–Given the Authority’s already high rating level and sector-wide risks inherent to seaports, upward rating action is unlikely.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
CREDIT UPDATE
Performance Update
Port Houston’s operating revenues increased by approximately 33% in fiscal 2021, and continue to grow into fiscal 2022, up 51% YTD through June. With expenses (excluding depreciation) increasing by approximately 8%, the increase in operating revenues lead to higher net cash flow (NCF) at $282 million versus $181 million in fiscal 2020. Fitch expects operating margins to remain strong and NCF to continue to provide sound funding for pay-go capital.
From the operational side, container traffic as measured in TEUs rose by nearly 18% YTD fiscal 2022 through June, following similar growth of nearly 16% in fiscal 2021. Total cargo tonnage reached record levels in 2021 at nearly 52 million tons, surpassing the previous record of 48 million tons in 2019. Total steel tonnage at the Authority’s facilities increased by 50% in 2021. YTD 2022 steel imports are up 102%, as drilling operations and the demand for drilling pipe increased. Auto imports saw growth of 411% in June 2022, but YTD growth overall remains flat.
The ongoing diversions of freight from US West Coast ports, as well as an increase in Asian imports has contributed to the strong increase in volume at the port. In January 2022, Mediterranean Shipping Company announced Port Houston on the rotation in its ‘Santana’ trans-pacific service, which links Vietnam and Central China to the U.S Gulf and East Coasts. Utilization rates are high as a result and dwell times across the port have been increasing. The Authority continues to look for ways to improve container flow, including opening marine terminals on Saturdays for shippers to pull out import loads, and exploring assessing fees on import boxes that remain at the port past its allotted time.
The Port of Houston Authority’s CIP calls for roughly $1.08 billion in projects through 2026, in line with the rolling five-year CIP expectations of $1 billion in projects every five years. The slight increase in this year’s plan is due to the accelerated construction of wharves and container yards, and purchase of related equipment to meet current expanded and anticipated future demands. In addition to the $1.08 billion CIP, the Authority’s share of the Project 11 ship channel expansion totals approximately $538 million.
The current capital budget includes retrofitting for Barbours Cut; continued expansion of the Bayport terminal; dredging the channel depth at Barbours Cut and Bayport to 45 feet; and various turning basin, breakbulk, and general cargo facility improvements. There are no immediate plans to issue GO bonds; however, based on current cost estimates and timelines, though the Port indicates additional revenue bonds may be issued to finance its remaining share of the costs for accelerated completion of Project 11.
The Authority’s taxable district includes the entire Harris County which is the center of the Houston MSA. Harris County is the largest county in Texas and the third largest in the nation, encompassing all but a small portion of the city of Houston, with a population totaling over 4.6 million. The county features a large, diverse economy that remains exposed to the energy sector. Expansion of the health care, biomedical research, aerospace, port and petrochemical industries over the past several decades has reduced the historically strong reliance on the energy exploration sector.
The tax base is substantial at $507.992 billion in tax year 2021, growing by a CAGR of 6.9% from 2011-2021. The taxpayers are very diverse with the largest taxpayer, CenterPoint Energy, representing 0.82% of total assessed value in 2021. The top 10 taxpayers are a mix of oil & gas, utilities, industrial, and commercial. Property taxes are levied only to pay debt service on voter-authorized unlimited tax bonds.
FINANCIAL ANALYSIS
Fitch Cases
Fitch evaluated management’s projections for revenues, expenses, and CIP spending for fiscal 2022 through fiscal 2026, along with fiscal 2022 YTD performance to form its cases.
The Fitch Base Case assumes modest overall revenue growth of 2% through 2026 (vs. 2.5% in the Authority’s five-year plan) while expenses are assumed to grow at a 3.6% CAGR. Both the base and rating case assume funding of the full CIP, including the Project 11 portion, which requires $450 million of revenue bonds in 2023 to further support the Houston Ship Channel Expansion project. Fitch notes Port Houston management plans to fund the regular CIP through operational cash flow, but is considering various funding options for the future, including additional debt. Under these assumptions, coverage for revenue-backed debt is strong, averaging 9.8x through 2026. Leverage, defined as net debt/CFADS, remains low at 1.1x in 2026.
Fitch’s rating case considers a hypothetical recession in 2023, resulting in an 8% decline across all revenue categories, followed by 5% recovery in 2024, and full recovery to 2022 levels by 2025. Revenue growth averages 2% thereafter and expenses grow at a steady 4% per year through 2026. Fitch has assumed an additional $450 million debt issuance in 2023 to support the CIP (Project 11). Financial performance remains strong under this scenario, with an average DSCR of 8.8x and leverage at 2x in 2026.
Fitch views the Authority’s credit profile as extremely robust, with strong coverage levels and low leverage levels that are commensurate with an ‘AA’ rating. In addition to resilient credit metrics, the Authority benefits from flexibility provided by its liquidity position, its stable historical performance, and its ability to potentially fund future CIP needs using both the GO and revenue liens.
Asset Description
The Authority owns a diverse group of facilities designed to accommodate a variety of cargo, including general cargo, containers, grain, coal, pet coke, dry and liquid bulk and project and heavy lift cargo. In operation since 1914 as a deep draft port, the greater port of Houston is ranked first in the nation for foreign waterborne tonnage, and second in terms of total tonnage. The Houston Ship Channel extends 52 miles inland and links the city of Houston with the Gulf of Mexico. The channel serves some of the largest petrochemical terminals and refineries in the world. Generally, the Authority acts as a landlord port for breakbulk cargos, while acting as an operator for the container terminal yards, with a few exceptions.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
Source: Fitch Ratings