Fitch Affirms Chesapeake, VA's 2012 Sr. Toll Road Rev Bonds at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'BBB' rating on $150.7 million Chesapeake Transportation System (CTS) senior toll road revenue bonds, series 2012A and 2012B. The Rating Outlook is Stable.

The rating affirmation reflects the inherent seasonality in traffic on the Chesapeake Expressway and the expected commuting nature of the Dominion Boulevard facility once open, with construction progress for the Dominion Boulevard Project within budget through August 2016 and expected to be open to traffic by the end of this year. The rating considers modest dependence on traffic growth through the senior debt term and high opening year leverage. Fitch's rating case expects 10-year average senior coverage (post ramp-up) to be 1.87x, which is on the stronger side relative to its peers in the 'BBB' category and applicable criteria. However, the rating is constrained by CTS' higher leverage and an unproven operating history on the Dominion Boulevard Project.

KEY RATING DRIVERS

Advanced Stage of Construction (Completion Risk: Stronger from Midrange): Construction on the Dominion Boulevard was 93% complete at the end of August 2016 and is scheduled for completion in February 2017, ahead of the contractual completion date of April 1, 2017. Though construction risk remains throughout the project, the upgrade to stronger reflects an advanced stage of completion, adequate structural protections included in the contract, and the contractors' experience which mitigates remaining construction risk.

Stable, Growing Service Area (Revenue Risk -- Volume: Midrange): The Chesapeake, VA service area benefits from a growing population with a demonstrated traffic base on Chesapeake Expressway, albeit exposed to discretionary summer traffic to the Outer Banks. Despite being expected to serve a predominantly commuter user-base, dependency on the unproven Dominion Boulevard traffic is a risk.

Programmed Toll Increases (Revenue Risk -- Price: Midrange): CTS has put in place long-term toll increase plans on both its facilities that stretch into the foreseeable future, with annual above-inflation increases planned for the commuter-dominated Dominion Boulevard and five-year increases planned on the more seasonal Chesapeake Expressway. Toll rate changes are subject to review by the Transportation Toll Facility Advisory Committee (TTFAC) and public hearings.

Modest Ongoing Capital Needs (Infrastructure Development & Renewal: Stronger): CTS has modest capital needs in the near term, with the expressway constructed in 2001 and Dominion Boulevard being a new development. CTS has a renewal and replacement (R&R) reserve in place, with the city of Chesapeake handling maintenance.

Fixed Rate Debt with Escalating Debt Service (Debt Structure: Midrange): Both senior debt and the fully subordinated Virginia Transportation Infrastructure Bank (VTIB) loan benefit from fixed rate structures, though VTIB debt service accretes over its life as a result of its flexible structure that incorporates both deferrable scheduled debt service above a minimum mandatory payment and also a cash sweep to pay off debt sooner if operational performance allows.

High Coverage and Senior Leverage: Senior leverage is high at 8.1x using cash flow available for debt service (CFADS) from the fully ramped up year of 2020 in the rating case. Overall leverage for all liens in the rating case is 18.5x, but the deeply subordinated VTIB loan provides considerable credit enhancement to the senior debt as it does not feature a springing senior lien provision, nor does it cross default or cross-accelerate with senior debt. Senior coverage is stable and averages 2.25x over 10 years from the first fully ramped up year (2020) in the base case, and shows resilience in stress scenarios with coverages above 1.7x that reflect increased costs or drops in expected traffic volumes.

Peers: CTS' peers include Rickenbacker Causeway (Rickenbacker, rated 'BBB'; Outlook Stable) and Mid-Bay Bridge Authority (Mid-Bay, rated 'BBB+/BBB'; Outlook Stable). Both structures are exposed to discretionary traffic, with Rickenbacker more dependent on leisure traffic for 90% of its revenues. Similar to CTS, Mid-Bay has high overall leverage near 9x, while Rickenbacker has more moderate leverage near 5x. Leverage on CTS could, however, potentially increase or decrease depending on the performance of the Dominion Boulevard Project once operational.

RATING SENSITIVITIES

Negative:

--Greater than expected traffic diversion on the tolled Dominion Boulevard once operational or the reluctance to increase tolls in the event of below forecast traffic performance that results in increasing leverage and coverage persistently under 1.5x;

--Unexpected extended delays in construction or sizable use of completion bonds may result in rating action.

Positive:

--If, upon completion, CTS meets or exceeds traffic and revenue forecasts, with coverage consistently above 1.7x and sustaining leverage below 6x.

SUMMARY OF CREDIT

Construction of the Dominion Boulevard project remained on budget and on schedule as of August 2016. Contract work is now 93% complete and on schedule to be completed by February 2017, almost two months ahead of the original schedule. Current exposure is estimated at $322.2 million with $23.3 million in contingency remaining, equivalent to over 50% of remaining project costs. Fitch will continue to monitor the schedule and budget as compared to original expectations.

Traffic along the existing Chesapeake Expressway increased 4.5% over the prior year, while total revenues increased 7.8% in fiscal 2016. Expressway revenues are 3.3% lower than T&R consultant's original forecast but slightly exceeded Fitch's base case projections. Peak weekend revenues represented approximately 40% of total expressway revenues in fiscal 2016, indicating the importance of leisure traffic to the facility. Based on preliminary results, performance in 2016 produced debt service coverage ratios (DSCR) for senior obligations of 11.6x and total obligation coverage of 2.37x. The expressway's five-year R&R deposit forecast has increased compared to the year prior, with higher costs expected for toll equipment. R&R deposits will be revised following annual inspections by the consulting engineer and surplus revenues in excess of these deposits will be set aside as reserves or used to accelerate retirement on the subordinate VTIB loan.

Fitch's base and rating case traffic projections are modest, reflecting a 1.7% compound 10-year annual growth rate (CAGR) in the base case and a 0.7% 10-year CAGR in the rating case from the first full year of operations on Dominion Boulevard. Fitch will continue to monitor Chesapeake Expressway traffic levels in the coming years as the toll increase scheduled for 2016 went into effect around the end of May. Though it is a different facility from the project under construction, continued diversion, however marginal, could indicate that Dominion Boulevard is at risk to higher diversion than originally assumed despite its anticipated importance in providing an uninterrupted crossing over the Elizabeth River.

Fitch developed base and rating cases to analyze the potential impacts on cash flows of reduced traffic levels, higher operating expenses, and varying traffic diversion assumptions of 20-35% on the tolled Dominion Boulevard. Under various sensitivity cases with annual traffic growth limited to 0%-0.5% over the forecast period and expense growth profiles raised by 400-500 basis points annually, DSCRs reach a minimum of 1.7x in all scenarios and averages 2.25x and 1.87x in the 10-year (post ramp-up) base and rating case, respectively, on the 2012 A&B bonds without any additional toll increases beyond scheduled. Fitch views these levels of coverage as strong for the rating level and views favorably CTS' flexibility to increase rates if needed in the latter years as debt service escalates to maturity. However, given the unproven nature of tolled traffic on Dominion Boulevard, the rating is likely to be constrained until an operating history of demand becomes available.

Fitch also conducted a breakeven toll revenue growth scenario from the fully ramped-up year (2020) on the base and rating case, which reflected a 2.26% and 3.48% growth in toll revenues, respectively, as well as a 3% expense growth in order to maintain a 1.0x aggregate DSCR. An additional revenue growth breakeven was run on the rating case to consider all obligations, resulting in a required annual revenue growth rate of 3.7%. Fitch assumed drawing on cash reserves and the Debt Service Reserve Fund (DSRF) in order to supplement CFADs in meeting debt service obligations.

CTS is composed of the existing Chesapeake Expressway and the expansion of Dominion Boulevard. The City of Chesapeake owns and operates these assets and is responsible for their ongoing maintenance and improvement. The Chesapeake Expressway, an existing 10-mile, four-lane facility, opened in 2001 and is heavily used by tourists traveling to the Outer Banks. The Dominion Boulevard project will replace an existing two-lane drawbridge with a 95-foot fixed-span bridge and will also convert Dominion Boulevard into an all-electronic tolling four-lane highway from its current untolled two-lane configuration. The City of Chesapeake will be responsible for the upkeep of both assets, and the city expects to manage operations of the CTS through the city's Department of Public Works.

SECURITY:

The bonds are special, limited obligations of the City of Chesapeake payable from net toll revenues and reserves held for such purpose under the indenture. The bonds are not secured by a mortgage or deed of trust on, or other security interest in, the system.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/site/re/882594

Rating Criteria for Toll Roads, Bridges and Tunnels (pub. 11 Aug 2016)

https://www.fitchratings.com/site/re/886038

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Contacts

Fitch Ratings
Primary Analyst
Stacey Mawson
Director
+1-212-908-0678
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tanya Langman
Director
+1-212-908-0716
or
Committee Chairperson
Glaucia Calp
Managing Director
+57-1-484-6778
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com