TEXT-Fitch affirms Chesapeake Bay Bridge & Tunnel District, Va.
Sept 12 - Fitch Ratings affirms the 'A-' rating on the Chesapeake Bay Bridge and Tunnel District, VA's (the district) approximately $44.4 million in outstanding general resolution refunding revenue bonds (GRB), series 1998. The Rating Outlook is Stable. Fitch does not rate the district's approximately $64.1 million in outstanding series 2010A and series 2011A variable-rate refunding GRBs, which are parity bonds. KEY RATING DRIVERS: Monopolistic System with Exposure to Discretionary Travel: The district's bridge and tunnel facility is monopolistic in nature, serving as the only linkage between the metropolitan Hampton Roads region and Virginia's eastern shore. Volume has been relatively stable, growing at a 0.7% compound annual growth rate (CAGR) over the last decade. However, approximately 17% of traffic is estimated to be leisure in nature, destined for Virginia Beach and the Outer Banks region, providing some concern. Moderate Economic Rate-Making Flexibility: A lack of convenient competitive alternatives coupled with above average regional demographics provides the district with moderate rate-making flexibility despite the relatively high round-trip toll rates. The framework allows the district to set tolls at levels necessary for maintenance of capital assets. Management is contemplating 10-15% toll increases over the medium term to accumulate additional surplus funds for the anticipated expansion of the facility. Aggressive Capital Structure: The district variable rate debt component is high, at approximately 59%, and exposure to basis risk and counterparty credit risk is present. The district's variable rate debt is synthetically fixed through interest rate swap agreements. Low Leverage and Solid Balances: Existing leverage is low at 1.9 times (x) net debt/cash flow available for debt service (CFADS), supported by healthy unrestricted cash balances of $20.5 million representing 528 days cash on hand. Fitch's projects continued robust pro forma subordinate debt service coverage levels of 3.3x or greater through FY 2017. Legal provisions on the subordinate lien allow for a significant level of future dilution, with the additional bonds test requiring relatively low (1.2x) coverage of maximum annual debt service. Future Debt Needs: The district intends to cash fund its $109 million six-year capital program spanning fiscal years 2013 through 2018 to cover periodic maintenance expenses and the design of the proposed expansion of the parallel tunnel facility. Currently, additional debt to finance the roughly half of the costs of the Thimble Shoal Tunnel is expected in FY 2022 with the balance funded through internal liquidity (53%). WHAT COULD TRIGGER A RATING ACTION: --The district may be accelerating construction plans for the Thimble Shoal Tunnel project due to favorable market conditions. A financing structure that leaves general resolution bondholders with minimum financial cushion just above the 1.2x rate covenant and leverage in the low teens could result in rating pressure; --Management's ability to manage toll revenues and accumulate sufficient cash balances to fund the proposed facility expansion; --Significant deterioration in traffic performance. SECURITY: The GRBs are primarily secured by net revenues, subject to the prior lien of the senior general revenue bonds which matured on July 1, 2010. CREDIT UPDATE: Unaudited financial results for FY2012 indicate that toll revenue decreased by 1.4% to $44.9 million, reflecting a 1.3% decline in traffic relative to FY 2011 largely due to Hurricane Irene related closures in August 2011 and generally diminished travel demand over the first five months of FY2012 (down 5.8% over the same period in FY2011). Traffic increased December 2011 and grew by 3.4% in the last seven months of FY2012 compare to the same time period in the prior fiscal year. In FY2012, car and light truck traffic decreased at the same rate as the heavy truck traffic, down 1.2% from the prior year. Even though heavy truck traffic only accounted for 9% of traffic in FY2012, it produced approximately 22% of the facility's toll revenues demonstrating moderate dependence on commercial throughput for revenue generation. The district's average toll slightly declined to $12.75 in FY2012 from $12.77 in FY2011. The toll rate schedule remains the same since the last increase in 2004, with cars paying $12 and heavy trucks $35 for a one way trip. The district's operating expenses increased by 4.3% to approximately $14.2 million in FY2012 due to general operating and maintenance cost increases, as well as higher consultant fees. At the beginning of each FY, the district reserves for annual periodic maintenance capital expenditures. These preservation expenses are determined by the capital needs to maintain the overall infrastructure in a generally good or better condition, as determined by the independent annual inspection of the facility. In FY2012 these expenses amounted to $12.6 million, up from $8.6 million the prior year, but expenses were still below the $16 million budgeted for FY2012. The six-year capital development budget for FY2013 through FY2018 is estimated at $109.8 million and will be funded from cash flow and reserves available in the reserve maintenance fund (current balance estimated at $13.8 million). The district has accumulated about $191 million in unrestricted cash and investments as of the end of June, 2012. The district's unrestricted cash and investment balances are projected to increase as it continues accumulating cash to fund the proposed parallel tunnel project. The construction of two tunnels (one for the Thimble Shoals Channel and the other for the Chesapeake Channel) is currently projected to be completed in two parts. Under the most recent model, the four year construction phase of the Thimble Shoal Tunnel will begin in FY2018 with design and construction estimated at $1.04 billion. More than half of the costs (53%) are expected to be cash funded, with the remainder funded by debt. The second part of construction for the Chesapeake Tunnel, estimated at $1.95 billion, is currently not expected to begin until FY2042 with funding from a combination of cash and debt. Mitigating the concern over the planned expenditures is the facility's proven ability to raise toll rates without a material decline in traffic and revenues. Management has indicated that toll rate increases will likely be necessary to support the parallel tunnel project initiatives. The total debt service coverage ratio (DSCR) in FY2012 increased to 3.38x from 1.98x in the prior year. The debt service profile remains relatively level from FY2012 through FY2020 at about $11.4 million before declining in FY2021 when the series 2010A GRBs mature. Debt service increases again to approximately $16 million in FY2024 when series 1998 GRB principal amortization starts and it remains flat through the final maturity in FY2026. Based on Fitch's estimates that incorporated intended toll increases, DSCR will remain in the 3-4x range through FY2020. When the first debt installment is included in the forecast starting FY2022, coverage is projected at or below 1x.
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