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
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
--Management's ability to manage toll revenues and accumulate sufficient cash
balances to fund the proposed facility expansion;
--Significant deterioration in traffic performance.
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.
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
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.