USA: Fitch Rates Port of Houston Authority
Fitch Ratings has assigned an ‘AAA’ rating to the following Port of Houston Authority, Texas’ unlimited tax limited bonds (ULT):
-$49.45 million ULT refunding bonds, series 2011 (AMT/Taxable).
The series 2011 bonds are scheduled for negotiated sale on Sept. 20, 2011. Proceeds from the sale will be used to refund outstanding bonds for interest savings.
In addition, Fitch affirms its ‘AAA’ rating on the $763.6 million (pre-refunding) in outstanding Port of Houston Authority ULT bonds.
The Rating Outlook is Stable.
The bonds are secured by an unlimited property tax pledge on all taxable property within the authority, which is essentially coterminous with Harris County, TX (the county’s ULTGO and LTGO bonds are rated ‘AAA’ by Fitch).
KEY RATING DRIVERS
Expansive Tax Base: The authority’s property tax base is very large and diverse, coterminous with the tax base of Harris County, Texas. Preliminary taxable assessed valuation (TAV) figures show stabilization of the tax base for fiscal 2012 following moderate contraction in fiscal 2011.
Fairly Resilient Economy: The end of the energy boom contributed to a strong recessionary impact to the local economy beginning in 2009. However, the area’s housing market remains relatively healthy as evidenced by steady home prices, which Fitch believes will aid the economy’s return to growth. Net gains in jobs in recent months suggest local economic conditions may be improving.
Sound Financial Profile: The authority’s financial profile is characterized by ample liquidity and generally positive net operating income. Freight volume continues to improve after sharply declining in 2009 as a result of the global economic downturn.
Sizable Capital Plan: The authority’s forward-looking capital improvement plan (CIP) positions it for continued pre-eminence as a major national port, with expansion to its cargo and ship capacity needed to accommodate an anticipated increase in demand.
Above Average & Growing Debt Profile: The capital intensive nature of port operations and large number of overlapping taxing entities bring the overall debt burden to above average levels and principal payout is slow. Debt levels will likely rise, in support of the sizeable CIP, but remain within a range consistent with the high rating.
The authority operates all public facilities of the Port of Houston (the port) and helps maintain the 52-mile ship channel that connects it to the Gulf of Mexico. The port is one of the nation’s largest maritime ports, ranking first among all U.S. ports in foreign tonnage and second in total tonnage. All outstanding bonds of the authority are ULTGO and are supported with the property tax levy, and tax revenues are used solely for debt service.
The authority’s large and diversified tax base encompasses the city of Houston and is essentially coterminous with Harris County (rated ‘AAA’ with a Negative Outlook by Fitch). With a population of 4.1 million, Harris County is the largest county in Texas and the third largest in the nation. The county experienced solid growth since the 2000 census with the majority occurring in the unincorporated areas.
Falling oil prices have taken their toll on the job market of the Houston metropolitan statistical area (MSA). Consequently, the MSA’s unemployment rate has exceeded 8% every month since June 2009. The June 2011 unemployment rate totaled 9%, which is just above the state rate but below the U.S. rate. As a possible sign of a stabilizing economy, the MSA posted a 2% increase in employment for the 12-months ending July 2011.
Property taxes are levied only to the extent necessary to pay debt service on voter-authorized ULTGO bonds. Total TAV declined 4% in fiscal 2011 (fiscal year ended Dec. 31) after growth slowed from prior years, but the tax base remains large at $264 billion for the fiscal 2011 levy. Preliminary fiscal 2012 TAV estimates for the authority indicate flat to 1% growth. Stabilization in the tax base is attributable to the relatively stable residential taxable values, as home prices were not subject to high rates of appreciation prior to the recession, aided by ample land and limited zoning regulations.
Single-family housing starts within the county declined from 2007-2009 by 22%-28% annually, although 2010 permit activity declined by a more modest 5%. The top 10 taxpayers accounted for a modest 5.2% of the total TAV in fiscal 2011, but five of the 10 were in the oil and gas sector.
Financial performance of the authority continues to be favorable, evidenced by sizable cash reserves and net income posted in four of the past five fiscal years. A small net deficit in fiscal 2009 reflects one time litigation costs. Freight traffic improved in 2010 following a decline in 2009 associated with the global recession. Fiscal 2010 operating revenues — primarily dockage, wharfage, and crane fees directly correlated with freight volume — rebounded to 9% growth following a 14% decline in fiscal 2009. With the growth in freight traffic, fiscal 2010 results show $25 million in net income. The authority also held significant unrestricted cash and investment balances at fiscal year-end totaling $234 million or 1.2 times annual operating costs.
Management reports that freight volume continues to strengthen in fiscal 2011, with total cargo tonnage up 11% on a year-over-year basis through July. Cost containment measures were implemented to curb general and administrative costs, including a hiring and salary freeze and reduced spending on contract and marketing services. As a result, year-to-date financial results show a moderate net operating income of $6 million and management expects to end with at least break-even results.
Overall debt ratios are elevated at 6.5% of market value (MV) and $5,493 per capita — however, Fitch notes that these ratios do not account for direct state support for numerous area school districts, resulting in somewhat inflated overall debt ratios. This series of refunding bonds is being issued for level interest savings with no extended maturities. With this issuance, amortization remains slow with 27% of principal retired in 10 years.
The authority is in the midst of funding its sizable capital improvement program, particularly on the Bayport project, which is an estimated $1.8 billion, 15-20 year project to build new freight and ship terminals and to deepen the Bayport channel to accommodate larger ships. The authority’s capital needs are being driven to a degree by increased demand for the port resultant from the expansion of the Panama Canal that should be completed by 2015 – the port is the closest major port to the canal.
Capital spending plans show a sizable drawdown on the authority’s cash reserves over the next three years, but officials plan to seek federal reimbursement for a portion of the dredging costs and may also utilize a short-term credit facility. Management maintains an informal minimum cash target of $50 million-$75 million, which Fitch views as adequate. Additionally, some of the capital projects are demand driven and can be reduced or eliminated if growth in cargo does not materialize, and Fitch views the authority’s successful implementation history as a credit positive.
Source: marketwatch, September 13, 2011;