Fitch Affirms Chesapeake (VA) 2012 Sr Toll Road Rev Bonds 'BBB'; Outlook Stable

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

The affirmation of the 2012 bonds reflects traffic and revenue levels largely meeting expectations along the existing Chesapeake Expressway, and construction progress for the Dominion Boulevard Project remaining on schedule and budget through February 2014 to meet the projected completion date of April 2017. The rating reflects inherent seasonality in traffic on the Chesapeake Expressway, the expected commuting nature of the Dominion Boulevard facility once open, modest traffic growth projections through the senior debt term, moderate-to-high opening year leverage, and the risks posed by a reasonably complex project during construction.

KEY RATING DRIVERS:

Some Construction Risk: Construction risk associated with the expansion of Dominion Boulevard exists. While adequate structural protections included in the contract, the contractors' experience, and the project's progress to date (on schedule and budget through February 2014) provide comfort, risk remains through the construction phase of the project. Completion Risk: Midrange

Stable, Growing Service Area: 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 that increases over time on unproven Dominion Boulevard traffic is a risk. Revenue Risk -- Volume: Midrange

Programmed Toll Increases: The Chesapeake Transportation System (CTS) has put in place long-term toll increase plans on both its facilities that stretch over 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. There is heavy reliance in the early years on the expressway while the Dominion Boulevard facility is built. Revenue Risk -- Price: Midrange

Modest Ongoing Capital Needs: 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. Infrastructure Development & Renewal: Stronger

Fixed Rate Debt with Escalating Debt Service: Both senior debt and the subordinated Virginia Transportation Infrastructure Bank (VTIB) loan benefit from fixed rate structures, though the debt service profile accretes over its life. The VTIB loan benefits from a flexible structure, with debt service above a minimum mandatory payment schedule being deferrable coupled with the ability to sweep excess cash flow to pay off debt sooner. Debt Structure: Midrange

Relatively High Overall Leverage: While overall leverage is high at 11.0x, leverage on the senior lien is moderate at 5.3x, using cash flow available for debt services (CFADS) from the fully ramped up year of 2020 in the sponsor case. The deeply subordinated VTIB loan provides considerable credit enhancement to the senior debt - it does not feature a springing senior lien provision, nor does it cross-default or cross-accelerate with senior debt. Senior coverage is stable above 2.4x in the sponsor case, and shows resilience in stress scenarios that reflect increased costs or drops in expected traffic volumes.

RATING SENSITIVITIES:

--Significant delays in construction, escalation in costs, or sizable use of completion bonds may result in rating action.

--Should more significant traffic diversion than expected be observed on the tolled Dominion Boulevard, or should the city of Chesapeake show reluctance to increase tolls in the event of traffic performance well below forecast, rating action may be necessary.

--If, upon completion, CTS consistently exceeds current traffic and revenue forecasts, positive rating action may result.

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.

CREDIT UPDATE:

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, 4-lane facility, opened in 2001 and is used heavily by tourists traveling to the Outer Banks. The Dominion Boulevard project will replace an existing 2-lane drawbridge with a 95-foot fixed-span bridge, and will also convert Dominion Boulevard into an all-electric tolling 4-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.

Traffic along the existing Chesapeake Expressway lagged forecast by 3% in fiscal 2013 as commuting patterns to and from the city exhibited minor diversion to the neighboring Battlefield Boulevard (State Route 168). Revenue met Fitch's base case projection, however, as weekend peak and truck transactions grew. Weekend peak days account for only 9% of volume but 43% of revenues, up from 25% in 2010, reflecting the 2011 toll increase which led to revenue growth of 14.9% and 28.7% in fiscal years 2011 and 2012, respectively, despite 1.8% and 16.8% declines in traffic those same two years. Debt service coverage of senior obligations totaled 15.99x in fiscal 2013 and 2.15x when including the city's required deposits to the maintenance reserve fund.

Fitch's base and rating case traffic projections are modest: a 1.4% compound annual growth rate (CAGR) in the base case and a 0.9% CAGR in the rating case from the first full year of operations on Dominion Boulevard, and Fitch will continue to monitor Chesapeake Expressway traffic levels in the coming years before the next toll increase scheduled for 2016. Though it is a different facility from the project under construction and relies on weekend summer peak traffic for a large portion of its revenues, continued diversion, however marginal, could reflect commuter patterns in the area which mean that Dominion Boulevard is at risk to higher diversion than originally assumed despite its anticipated importance once open in providing an uninterrupted crossing over the Elizabeth River.

The Dominion Boulevard project remains on budget and on schedule through February 2014. Management indicates 46% of costs out of a total estimated contract value of $204.2 million have been incurred to date, with $29.9 million in contingency remaining. Adding remaining projected right-of-way costs to the contract value, this contingency amounts to over 25% of remaining costs to complete the project. Fitch will continue to monitor the schedule and budget as compared to original expectations.

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%-0.5% over the forecast period and expense growth profiles raised by 200 basis points annually , debt service coverage ratios remain at or above 1.7x on the 2012 A&B bonds without any additional toll increases. Fitch views these levels of coverage as strong for the rating level, and views favorably CTS's 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 demand can been proven upon opening of the new facility.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Oct. 16, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Toll Roads, Bridges and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=720736

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827440

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