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

The rating affirmation reflects traffic and revenue growth in 2014 along the existing Chesapeake Expressway, with construction progress for the Dominion Boulevard Project remaining on schedule and within budget through February 2015. 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

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

Revenue Risk -- Volume: 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 on the unproven Dominion Boulevard traffic is a risk.

Revenue Risk -- Price: Midrange
Programmed Toll Increases: 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. There is heavy reliance in the early years on the expressway while the Dominion Boulevard facility is built.

Infrastructure Development & Renewal: Stronger
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.

Debt Structure: Midrange
Fixed Rate Debt with Escalating Debt Service: 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.

Moderate Senior 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 service (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 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 14x, while Rickenbacker has more moderate leverage near 5x.

RATING SENSITIVITIES

Negative:
--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.

Positive:
--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

Construction of the Dominion Boulevard project remained on budget and on schedule as of February 2015. Contract work is now 54% complete and on schedule to be completed by April 1, 2017. Current estimate of total project cost is \$322 million with \$23 million in contingency remaining, equivalent to over 25% of the \$89 million of project costs remaining. Fitch will continue to monitor the schedule and budget as compared to original expectations.

Traffic along the existing Chesapeake Expressway increased 2.8% over the prior year, while total revenues increased 1.8% in fiscal 2014. Expressway revenues are 4.3% lower than T&R consultant's original forecast but exceeded Fitch's base case forecast by 1.9%. Peak weekend revenues represented 41% of total expressway revenues in fiscal 2014, indicating the importance of leisure traffic to the facility. Expenses are 24% below the original forecast offsetting the impact of revenues below original forecast. Performance in 2014 produced debt service coverage ratios (DSCR) for senior obligations of 1.62x when including the city's required deposits to the maintenance reserve fund. The expressway's five-year R&R deposit forecast has been revised lower following annual inspection by the consultant engineer, with surplus revenues to be deposited in reserves for debt repayment.

Fitch's base and rating case traffic projections are modest, reflecting 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, 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%-0.5% over the forecast period and expense growth profiles raised by 200 basis points annually, DSCRs remain at or above 1.7x and averages 2.1x 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 has been proven.

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.