Market Overview

Fitch Affirms Chesapeake Bay Bridge & Tunnel District, VA's General Resolution Revs at 'A-'

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NEW YORK--(BUSINESS WIRE)--

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 $70.5 million series 2010A and series 2011A in outstanding refunding GRBs, which are parity bonds.

KEY RATING DRIVERS:

--The monopolistic nature of the district's bridge and tunnel facility, which provides the only linkage between Virginia's eastern shore. The metropolitan area of South Hampton Roads, VA, has resulted in a mature traffic base. Over the last decade, traffic grew at a 1.4%,compound annual growth rate (CAGR) reaching 3.6 million in fiscal year (FY) 2011 (fiscal year ends June 30). The district's exposure to approximately 17% in discretionary seasonal leisure traffic is of some concern.

--Moderate economic rate-making flexibility which allows the district to set tolls at levels necessary for maintenance of capital assets as well as to accumulate cash to partially fund a future expansion of the parallel tunnel facility.

--Aggressive capital structure with exposure to basis risk and counterparty credit risk associated with variable-rate debt that represents approximately 61% of total debt and is synthetically fixed through interest rate swap agreements.

--Healthy financial performance is demonstrated by solid net revenue generation, robust debt service coverage levels and unrestricted cash balances (more than 1,000 days cash on hand), and very low existing leverage on a net debt-to-cash flow available for debt service basis. Fitch's projections through FY 2016 reflect pro forma subordinate debt service coverage of 3.3 times (x) or greater.

--Legal provisions on the subordinate lien allow for a significant level of future dilution, with additional bonds test at a relatively low 1.2x of maximum annual debt service.

WHAT COULD TRIGGER A RATING ACTION:

--Changes to the current profile of financial flexibility and strong coverage levels, continued growth in unrestricted reserves and limited additional leverage prior to the construction of the parallel tunnel facility.

--Unstable levels of 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:

The unaudited financial data for FY2011 indicate that toll revenues increased by 0.8% to $45.5 million, reflecting a slow recovery in traffic, which increased 1.4% over FY2010. The traffic increase was tempered by the sharp rise in gasoline prices during May and June 2011 that resulted in a 4.3% traffic decline over the same two-month period in FY2010, underscoring the exposure to seasonal leisure traffic and the sensitivity of such traffic to economic swings. In FY2011, cars and light truck traffic increased 1.8% while heavy truck traffic decreased 2.5%. Even though heavy truck traffic only accounted for 9% of traffic in FY2011, 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 $12.77 in FY2011 from $12.84 in FY2010. 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.

Operating expenses remained relatively flat in FY2011 at approximately $14 million. 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 FY2011 these expenses amounted to $8.6 million, up from $3.4 million the prior year. There were some delays in project implementation which caused certain expenditures to be rolled over from FY2010 to FY2011, but expenses were still below the $16.3 million budgeted for FY2011. The six-year capital development budget for FY2012 through FY2017 is estimated at $106.6 million and will be funded from cash flow and reserves available in the reserve maintenance fund.

The total debt service coverage ratio (DSCR) in FY2011 increased to 1.96x from 1.83x in the prior year. The coverage ratio is projected to increase significantly to more than 3x in FY 2012 following the reduction in debt service obligations to $11.3 million from $19 million since the series 2001 bonds matured on July 1, 2010. The debt service profile remains relatively level from FY2012 through FY2020 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.

The district has accumulated about $198 million in unrestricted cash and investments as of the end of June 2011. 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 previously planned simultaneous construction of two tunnels (one for Thimble Shoals Channel and the other for Chesapeake Channel) in FY2025 is now 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 FY2022 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 Chesapeake Bay Bridge and Tunnel is a 20-mile, four-lane trestle and bridge, and two-lane tunnel crossing the Chesapeake Bay between the cities of Virginia Beach and Norfolk to the south and Northampton County on the eastern shore of Virginia to the north. The facility is part of U.S. Route 13, the main north-south highway on Virginia's eastern shore and the metropolitan area of South Hampton Roads, VA. The Chesapeake Bay Bridge and Tunnel Commission is the governing body of the district and was established in 1954 to construct, maintain, repair and operate the bridge and tunnel. The district is led by a governing body consisting of 11 members appointed by the governor of the commonwealth of Virginia. One member represents the commonwealth transportation board and the remaining members represent the localities within the district comprising Virginia Beach, Norfolk, Portsmouth, Chesapeake, Hampton, Newport News and the eastern shore counties of Northampton and Accomack. Members serve four-year terms with a maximum of two terms.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research

--'Rating Criteria for Infrastructure and Project Finance,' (Aug. 16, 2011);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels,' (Aug. 5, 2011).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

Rating Criteria for Toll Roads, Bridges, and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646421

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Fitch Ratings
Primary Analyst
Tanya Langman, +1-212-908-0716
Associate Director
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Emari Wydick, +1-312-606-2308
Director
or
Committee Chairperson
Seth Lehman, +1-212-908-0755
Senior Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com

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