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Credit Outlook Summary: Hurricane Harvey's Credit Implications

Core Content Overview

This document outlines the credit implications of Hurricane Harvey, focusing on its impact on various sectors and entities, including refiners, casinos, transportation infrastructure, and utilities. It also includes analysis of the broader economic effects and potential credit risks and opportunities.

Main Sectors and Key Credit Impacts

Gulf Coast Refiners

• Credit Negative: Widespread shutdowns and reduced operations significantly impacted refining capacity, with about 20%-25% of US refining capacity affected.
• Key Entities:
  • Motiva Enterprises LLC (Baa1 stable): Operates the largest US refinery, with a controlled shutdown due to flooding. Strong ownership support helps mitigate credit risk.
  • Exxon Mobil Corporation (Aaa stable): Affected 922,000 bpd of capacity, equivalent to half of its US refining capacity.
  • Valero Energy Corporation (Baa2 stable): No substantial effects on two Corpus Christi locations, but Houston area refineries are operating at reduced rates.
  • Phillips 66 (A3 negative): Shut down its Sweeny, Texas facility (260,000 bpd, 12% of total capacity).
  • Shell Oil Company (Aa3 stable): Shut down its Deer Park, Texas refinery (340,000 bpd).
• Mitigation Factors:
  • Diversified operations and integrated energy companies limit exposure.
  • Strong ownership support and liquidity help buffer against short-term disruptions.
  • Refining margins may improve due to reduced product output and higher prices.

Casino Operators in Lake Charles, Louisiana

• Credit Negative: Casinos in Lake Charles, which rely heavily on Houston customers, are negatively affected.
• Key Entities:
  • Golden Nugget, Inc. (B2 stable): Most affected, with 70% of its revenue from Lake Charles.
  • Pinnacle Entertainment, Inc. (Ba3 stable): Derives 15% of revenue from Lake Charles.
  • Boyd Gaming Corporation (B2 positive): Affected to a lesser extent due to proximity to Houston.
  • Eldorado Resorts, Inc. (B1 stable): Likely unaffected as it sold its Lake Charles casino to a private entity.

Transportation Infrastructure

• Toll Roads and Airports:
  • Credit Positive: Strong liquidity and cost-recovery mechanisms help mitigate short-term losses.
  • Key Entities:
    • Fort Bend County Toll Road Authority (A2), Harris County Toll Road Authority (Aa2), Blueridge Transportation Group (Baa3), Houston (City of) Texas Airport Enterprise (A1).
  • Impact: Toll road revenue will be most affected due to shutdowns. Airports face reduced passenger volume and parking revenue due to travel disruptions and infrastructure damage.
• Ports:
  • Credit Negative: Corpus Christi, Galveston, Beaumont, and Port Arthur ports are more exposed due to limited revenue guarantees and reliance on regional economic activity.
  • Credit Positive: Lake Charles and Corpus Christi ports are less exposed due to strong liquidity and energy-related operations.
  • Key Entities:
    • Port of Corpus Christi Authority (Neues) (A1), Port of Port Arthur Navigation District (Aa3), Port of Houston Authority (Aaa), Galveston Wharves Board of Trustees (Baa1), Port of Beaumont Navigation District (A3), Lake Charles Harbor and Terminal District (A3).

Utilities

• Credit Positive: Strong liquidity and cost-recovery provisions allow utilities to manage Harvey's effects.
• Key Entities:
  • AEP Texas (Baa1 stable), CenterPoint Energy Houston Electric (CEHE, A3 stable), Entergy Texas (Baa3 stable), Texas-New Mexico Power Company (TNMP, A3 stable).
• Impact:
  • Power outages affected 23% of customers, but most were restored by 31 August.
  • Utilities have access to reserves and can issue securitization bonds if needed.
  • UCRC Securitizations: May draw on reserves due to reduced electricity consumption, but structural features like "true-up" mechanisms help offset credit risks.

Key Financial and Operational Points

• Refining Capacity: 3.0 million bpd of US refining capacity was shut down, with an additional 1.5 million bpd operating at reduced rates.
• Liquidity and Recovery: Most refiners, toll roads, and airports have sufficient liquidity to manage short-term disruptions.
• Economic Impact: Reduced regional economic activity and freight mobility may have long-term effects on ports and related industries.
• Recovery Timeline: Refiners may take weeks or months to restart operations, depending on infrastructure damage and logistics challenges.
• Credit Outlook: While some entities face credit negatives, others benefit from improved margins or reduced exposure.

Credit Positive Developments

• Freeport-McMoRan (Baa1 stable): Deal on Indonesia mine is credit positive.
• Evergrande (Baa2 stable): Deleveraging plans are credit positive.
• US G-SIBs: First-time liquidity coverage ratio disclosure is credit positive.
• Brazil: Approval of covered bond regulation is credit positive for banks.
• HSH Nordbank: Improved solvency raises prospects for privatization, a credit positive.
• Nigerian Banks: Benefit from moderating foreign-currency lending.
• UnitedHealth: Acquisition of The Advisory Board Company's health care business is credit positive.
• Poland: Stronger-than-expected growth and fiscal performance are credit positive.

Credit Negative Developments

• Boyd Gaming Corporation (B2 positive): Acquisition of Delta Downs Casino is credit negative.
• Dominican Republic: Economic slowdown is credit negative for banks.
• TPC Group Inc. (B3 negative): Third-quarter results are negatively affected due to production shutdowns and increased costs.
• Independent Refiners: May benefit from higher refining margins and reduced outage costs.

Conclusion

Hurricane Harvey has had a mixed impact on credit profiles across different sectors. While some entities, particularly those in the Gulf Coast, face short-term credit challenges due to operational shutdowns and infrastructure damage, others benefit from improved margins, strong liquidity, and diversified operations. The overall credit outlook remains stable for most major players, with mitigating factors such as cost-recovery provisions and ownership support helping to cushion the effects.