CHESAPEAKE BAY BRIDGE AND TUNNEL DISTRICT Quarterly Report for the Period Ending December 31, 2017

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2 Overview of the Financial Statements The Chesapeake Bay Bridge and Tunnel District s (the District) financial report for the quarter ended December 31, 2017 provides long-term and short-term information about the District s overall financial status. This report consists of two parts: management s discussion and analysis and the basic financial statements, including notes to the basic financial statements. Management s discussion and analysis introduces the basic financial statements and provides an analytical overview of the District s financial activities. The basic financial statements are the statements of net position as of and 2016, the related statements of revenues, expenses, and changes in net position and the statement of cash flows for the quarter and year then ended. The notes to the basic financial statements consist of information that is essential to a user s understanding of the basic financial statements. As it is considered a special-purpose government engaged only in business-type activities, the District follows enterprise fund reporting; accordingly, the basic financial statements are presented using the economic resources measurement focus and the accrual basis of accounting. Under this basis, revenues are recognized in the period in which they are earned, expenses are recognized in the period in which they are incurred, and depreciation of nonbridge-tunnel infrastructure assets is recognized in the statements of revenues, expenses, and changes in net position. All assets and deferred outflows of resources and liabilities and deferred inflows of resources resulting from the operation of the District are included in the statements of net position. Financial Highlights for the Quarter Gross toll revenues before deductions for the second quarter of fiscal year 2018 (Q2 FY18) were $13,066,628 and were 2.0% more than toll revenues in the second quarter of fiscal year 2017 (Q2 FY17). During Q2 FY18, total revenue vehicles of 919,207 crossed the District s facility. This represents an increase in vehicular traffic of 13,091, or 1.4% over Q2 FY17. Other revenues in Q2 FY18 totaled $298,576, which is an increase of $56,487, or 23.3% over other revenues in Q2 FY17. Operating expenses before District facility expenses in Q2 FY18 totaled $3,395,800, which is a decrease in operating expenses of $33,020, or 1.0% from Q2 FY17. Non-operating expenses totaled $3,236,015 in Q2 FY18, which is a decrease in non-operating expenses of $20,750,798, or 86.5% from Q2 FY17. The large improvement in non-operating expenses is due primarily to a one time writeoff in Q2 FY17 related to the early defeasance of debt issued under the prior bond resolution. Total net position at was $673,619,264, a 5.0% increase over total net position at December 31, Contacting the District s Financial Management This financial report is designed to provide the bondholders, customers, and other interested parties with a general overview of the District s finances and to demonstrate the District s accountability for the money it receives. If you have any questions about this report or need additional financial information, address your request to the Executive Director or the District Deputy Executive Director of Finance and Operations, Lankford Highway, Cape Charles, Virginia

3 Statement of Net Position and 2016 Assets and Deferred Outflows Current assets: Cash $ 1,087, ,348 Investments 63,310,754 56,912,072 Accounts receivable and accrued interest receivable, net 1,147,137 1,014,825 Prepaid expenses and other assets 306, ,018 Note Receivable 30,345 Total current assets 65,851,672 58,970,608 Restricted assets: Cash 13,520 18,186 Investments 247,568, ,228,049 Accrued interest receivable 22,057 1,209,219 Total restricted assets 247,604, ,455,454 Investments 134,077, ,369,540 Long term note receivable 42,687 Capital assets : Bridge and tunnel facilities, including capitalized interest 422,370, ,933,330 Construction in progress - Thimble Shoal Parallel Tunnel 194,641,207 46,999,748 Miscellaneous capital assets, net of accumulated depreciation 10,701,555 11,427,092 Total capital assets 627,712, ,360,170 Bond insurance costs, net of accumulated amortization 2,800,940 2,913,233 Deferred outflows of resources: Differences between expected and actual experience 86, ,948 Pension contributions 964,226 1,100,254 Pension investment experience 809,919 Total deferred outflows of resources 1,860,444 1,233,202 Total assets and deferred outflows of resources $ 1,079,907,340 1,026,344,894 Liabilities and Deferred Inflows Current liabilities: Accounts payable and accrued expenses $ 18,929,286 2,610,175 Accrued interest 7,912,875 2,241,981 Unearned revenue 702, ,823 Total current liabilities 27,544,805 5,546,979 Long Term liabilities: Long-term debt, net of current portion 360,517, ,053,654 Net pension liability 12,591,061 11,302,411 Other long term liabilities 5,367,423 5,367,423 Total long term liabilities 378,476, ,723,488 Deferred inflows of resources: Pension investment experience 826,523 Differences between expected and actual pension experience 266,887 Total deferred inflows of resources 266, ,523 Total liabilities and deferred inflows of resources 406,288, ,096,990 Commitments and contingencies Net Position Invested in capital assets, net of related debt 431,338, ,811,930 Restricted for debt service 61,936,728 63,603,105 Unrestricted 180,343, ,832,869 Total net position 673,619, ,247,904 Total liabilities and net position $ 1,079,907,340 1,026,344,894 See accompanying notes to basic financial statements. 3

4 Chesapeake Bay Bridge & Tunnel District Statement of Revenues, Expenses, and Changes in Net Position As of & 2016 Three Months Ended Six Months Ended Twelve Months Ended December, 2017 December, 2016 December, 2017 December, 2016 December, 2017 December, 2016 Operating revenues: Toll $ 12,768,907 12,516,159 31,532,291 31,526,615 56,710,311 56,405,705 Other 298, , , ,224 1,296,588 1,228,904 Total operating revenues 13,067,483 12,758,249 32,262,339 32,213,839 58,006,899 57,634,609 Operating Expenses: Administration 76,029 51, , , , ,145 Finance 164, , , , , ,548 Operations 1,095,233 1,074,764 2,183,293 2,145,192 4,329,040 4,262,517 Maintenance 942, ,094 1,861,115 1,803,063 3,746,705 3,588,236 General 854, ,986 1,726,867 1,800,479 3,302,570 3,196,366 Consultants 76, , , , , ,898 Utilities 187, , , , , ,659 Total operating expenses before district facility expenses 3,395,800 3,428,820 6,798,491 6,918,665 13,766,992 13,483,369 District Facility Expenses: Insurance Expenses 219, , , , , ,558 Depreciation Expenses 287, , , ,036 1,212,627 1,255,295 Bridge and Tunnel Preservation Expenses 347, ,556 1,449,862 1,775,249 2,795,834 4,395,000 Other Capital Asset Expenses & Expenditures 180,501 66, , , ,045 (569,688) Total district facility expenses 1,034,899 1,496,975 2,768,154 3,058,078 5,010,868 5,907,165 Total operating and district facility expenses 4,430,699 4,925,795 9,566,645 9,976,743 18,777,860 19,390,534 Operating income 8,636,784 7,832,454 22,695,694 22,237,096 39,229,039 38,244,075 Nonoperating revenues (expenses): Change in fair value of investments (1,277,159) (2,740,648) (1,443,469) (3,257,087) (2,280,709) (3,034,995) Interest income 1,490, ,501 3,081,458 1,547,272 6,708,106 3,223,805 Interest expense - Bonds (1,601,327) (1,821,179) (3,591,938) (3,188,600) (9,088,401) (5,408,021) Bond Issuance Costs - (1,983,627) - (2,050,743) (356,822) (2,050,743) Loss on Early Debt Defeasance - (18,323,103) - (18,323,103) - (18,323,103) Loss on Asset Disposal (1,835,351) - (1,835,351) - (1,835,351) - Other expenses, net (12,868) - (11,250) - (4,502) 1,359 Total nonoperating expenses, net (3,236,015) (23,993,056) (3,800,550) (25,272,261) (6,857,679) (25,591,698) Increase in net position 5,400,769 (16,160,602) 18,895,144 (3,035,165) 32,371,360 12,652,377 Total net position, beginning of year 668,218, ,408, ,724, ,283, ,247, ,595,527 Total net position, end of year $ 673,619, ,247, ,619, ,247, ,619, ,247,904 4

5 Statements of Cash Flows For the period ended Q2 FY2018 FYTD 2018 Cash flows from operating activities: Toll collections from customers $ 12,572,073 31,235,334 Scrip sales 112, ,585 Leasing revenue 256, ,580 Payments to employees for services and employee benefits (3,073,518) (5,598,351) Payments to suppliers and consultants (1,106,239) (2,685,218) Other (183,268) (316,450) Net cash provided by operating activities 8,577,756 23,528,480 Cash flows from investing activities: Purchases of investments (118,200,155) (494,698,989) Interest income 1,825,201 3,372,875 Sales and maturities of investments 137,131, ,254,803 Net cash used in investing activities 20,756,223 59,928,689 Cash flows from capital and related financing activities: Capitalized expenditures (29,145,218) (75,728,867) Forfeited assets 933 1,617 Disposal of capital assets 648 1,582 Other miscellaneous non-operating expenditures (13,000) (13,000) Interest paid (7,912,875) Net cash used in capital and related financing activities (29,156,637) (83,651,543) Net decrease in cash 177,342 (194,374) Cash, beginning of period 923,891 1,295,607 Cash, end of period $ 1,101,233 1,101,233 Cash and restricted cash are presented in the accompanying statements of net assets as follows: Cash $ 1,087,713 1,087,713 Restricted cash 13,520 13,520 $ 1,101,233 1,101,233 Reconciliation of operating income to net cash provided by operating activities: Operating income $ 8,636,784 22,695,694 Adjustments to reconcile operating income to net cash provided by operating activities: Depreciation 287, ,715 Increase (decrease) in operating assets: Accounts receivable (103,504) 383,505 Prepaid expenses and other assets 177, ,478 Increase (decrease) in operating liabilities: Accounts payable and accrued expenses (394,678) (389,235) Unearned revenue (25,964) (60,677) Net cash provided by operating activities $ 8,577,756 23,528,480 5

6 Chesapeake Bay Bridge and Tunnel District Statement of Cash & Investments As of GENERAL REVENUE BOND RESOLUTION FUNDS: Cash Investments Totals Unrestricted: Revenue Fund $ 1,070,851 2,391,769 3,462,620 Operations & Maintenance Reserve Fund - 3,801,834 3,801,834 Reserve Maintenance Fund 10,386 15,460,472 15,470,858 General Fund 6, ,733, ,740,369 Restricted: Parallel Thimble Shoal Tunnel Project Fund - 185,653, ,653,859 Series 2016 Bonds - Capitalized Interest Fund - 31,706,711 31,706,711 Series 2016 Bonds - Interest Fund - 3,956,437 3,956,437 TIFIA Debt Service Reserve Fund - 22,864,859 22,864,859 VTIB Debt Service Reserve Fund - 3,386,664 3,386,664 OTHER RESTRICTED ASSETS: Restricted Asset Forfeited Property Account 13,520-13,520 Totals $ 1,101, ,956, ,057,731 6

7 Chesapeake Bay Bridge and Tunnel District Statement of Investments As of BB&T Coupon Maturity Purchase Maturity Market Value Description Rate Date Date Value 12/31/2017 General Revenue Bond - Revenue Fund BB&T Trust Deposit Variable Not Fixed $ 2,391, ,391, ,391, ,391, General Revenue Bond - Operations & Maintenance Reserve Fund BB&T Trust Deposit Variable Not Fixed 3,801, ,801, ,801, ,801, General Revenue Bond - TIFIA Debt Service Reserve Fund Fannie Mae Global Notes 1.625% 11/27/18 07/07/17 11,365, ,347, FNMA Benchmark Notes 1.875% 12/18/20 07/07/17 11,360, ,298, BB&T Trust Deposit Variable Not Fixed 218, , ,943, ,864, General Revenue Bond - VTIB Debt Service Reserve Fund Fannie Mae Global Notes 1.625% 11/27/18 07/07/17 1,680, ,677, FNMA Benchmark Notes 1.875% 12/28/20 07/07/17 1,680, ,670, BB&T Trust Deposit Variable Not Fixed 38, , ,398, ,386, General Revenue Bond - Series 2016 Interest Fund BB&T Trust Deposit Variable Not Fixed 3,956, ,956, ,956, ,956, Parallel Thimble Shoal Tunnel Project Fund BB&T Trust Deposit Variable Not Fixed 70, , Local Government Investment Pool Variable Not Fixed 185,582, ,582, ,653, ,653, Series 2016 Bonds - Capitalized Interest Fund US Treasury Notes 2.375% 06/30/18 11/10/16 3,735, ,750, US Treasury Notes 1.375% 12/31/18 11/10/16 3,775, ,758, US Treasury Notes 1.625% 06/30/19 11/10/16 3,805, ,791, US Treasury Notes 1.625% 12/31/19 11/10/16 3,835, ,814, US Treasury Notes 1.625% 06/30/20 11/10/16 3,865, ,836, US Treasury Notes 1.750% 12/31/20 11/10/16 3,900, ,872, US Treasury Notes 1.125% 06/30/21 11/10/16 4,900, ,745, BB&T Trust Deposit Variable Not Fixed 4,136, ,136, ,951, ,706, GR Reserve Maintenance Fund BNP Paribas NY Branch Commercial Paper Discount 01/26/18 07/27/17 2,500, ,497, Credit Agricole CIB NY Commercial Paper Discount 02/26/18 11/27/17 2,000, ,995, Credit Agricole CIB NY Commercial Paper Discount 05/29/18 11/27/17 2,000, ,985, Bank of Tokyo Mitsubishi Commercial Paper Discount 07/10/18 10/13/17 1,000, , US Treasury Notes 0.750% 09/30/18 12/04/17 1,500, ,489, Money Rate Savings Account Variable Not Fixed 5,433, ,433, BB&T Trust Deposit Variable Not Fixed 1,069, ,069, ,503, ,460, GR General Fund Toyota Motor Credit Corp. Notes 1.450% 01/12/18 01/07/15 580, , Berkshire Hathaway Global Notes 1.550% 02/09/18 02/11/13 2,450, ,448, Chevron Corporation Notes 1.365% 03/02/18 02/24/15 1,250, ,249, Exxon Mobil Corporation 1.305% 03/06/18 03/09/15 2,500, ,497, BNP Paribas NY Branch Commercial Paper Discount 04/11/18 10/13/17 3,750, ,732, Microsoft Gorp. Global Notes 1.000% 05/01/18 05/02/13 1,225, ,222, Apple Inc. Global Notes 1.000% 05/03/18 05/03/13 1,280, ,276, Berkshire Hathaway Notes 1.300% 05/15/18 05/15/13 350, , Virginia State Taxable Build America Bonds 2.750% 06/01/18 10/27/10 6,780, ,806, Toyota Motor Credit Corp. Notes 1.550% 07/13/18 07/13/15 2,090, ,086, Bank of Tokyo Mitsubishi Commercial Paper Discount 06/19/18 12/10/17 3,750, ,718, JP Morgan Securities Commercial Paper Discount 07/20/18 10/24/17 3,300, ,266, M Company Corporate Note 1.375% 08/07/18 08/07/15 500, , Svenska Handelsbanken NY LT CD 1.890% 01/10/19 01/10/17 3,750, ,733, Federal Home Loan Bank Notes 1.375% 03/18/19 03/17/17 1,300, ,292, Federal Home Loan Bank Notes 1.375% 03/18/19 03/17/17 3,045, ,694, Federal Home Loan Bank Agency 1.375% 05/28/19 05/15/17 1,270, ,261, Federal Home Loan Bank Agency 1.375% 05/28/19 05/11/17 2,510, ,492, Freddie Mac Global Notes 1.750% 05/30/19 12/15/16 5,000, ,992, Freddie Mac Global Notes 1.750% 05/30/19 02/03/17 2,210, ,206,

8 Chesapeake Bay Bridge and Tunnel District Statement of Investments As of BB&T Coupon Maturity Purchase Maturity Market Value Description Rate Date Date Value 12/31/2017 GR General Fund (Continued): US Treasury Notes 1.500% 05/31/19 11/14/16 $ 540, , US Treasury Notes 1.250% 06/30/19 07/11/17 2,500, ,130, Federal National Mortgage Assn % 06/20/19 12/14/16 2,400, ,396, Federal Home Loan Mortgage Corp. Notes 0.875% 07/19/19 01/03/17 6,320, ,221, Freddie Mac Global Notes 1.250% 08/01/19 07/30/12 2,300, ,277, Federal Home Loan Bank 0.875% 08/05/19 08/03/16 5,000, ,918, Freddie Mac Notes 1.375% 08/15/19 07/18/17 1,965, ,948, US Treasury Notes 1.000% 09/30/19 04/30/15 1,755, ,729, Freddie Mac Global Notes 1.250% 10/02/19 09/28/12 3,000, ,964, International Bank of Recon & Dev Global 1.875% 10/07/19 09/27/17 1,675, ,671, Fannie Mae Global Notes 1.000% 10/24/19 12/06/16 7,100, ,984, FNMA Benchmark Note 1.750% 11/26/19 12/03/14 2,000, ,993, Freddie Mac Global Notes 1.500% 01/17/20 02/03/17 1,850, ,832, Freddie Mac Agency Notes 1.500% 01/17/20 04/03/17 5,000, ,952, IBM Corporation Notes 1.900% 01/27/20 02/23/17 3,650, ,633, Microsoft Corp % 02/06/20 01/30/17 910, , Apple Inc. Bonds 1.900% 02/07/20 02/02/17 2,945, ,936, Federal National Mortgage Assn % 02/28/20 02/24/17 1,990, ,969, Federal National Mortgage Assn % 02/28/20 02/24/17 8,300, ,213, Toyota Motor Credit Corp % 04/17/20 04/11/17 1,020, ,015, Federal Home Loan Mortgage Corp. Notes 1.375% 04/20/20 04/20/17 1,995, ,966, Federal Home Loan Mortgage Corp. Notes 1.375% 04/20/20 05/31/17 9,000, ,872, Federal Home Loan Mortgage Corp. Notes 1.375% 04/20/20 06/29/17 2,200, ,168, Federal Home Loan Mortgage Corp. Notes 1.375% 04/20/20 06/05/17 4,365, ,303, US Treasury Notes 1.500% 06/15/20 07/11/17 1,285, ,272, Federal Home Loan Mortgage Corp. Notes 1.375% 04/20/20 06/26/17 3,000, ,957, Federal Home Loan Mortgage Corp. Notes 1.375% 04/20/20 11/13/17 1,570, ,547, FNMA Notes 1.500% 07/30/20 08/31/17 3,750, ,703, International Bank of Recon & Dev Global 1.561% 09/12/20 09/19/17 3,355, ,295, Federal Home Loan Bank Notes 1.375% 09/28/20 09/07/17 2,325, ,284, Proctor & Gamble Co. Corp. Notes 1.900% 10/23/20 10/25/17 730, , Swedbank New York CD 2.270% 11/16/20 11/17/17 2,655, ,640, Johnson & Johnson Corp. Notes 1.950% 11/10/20 11/10/17 755, , Federal Home Loan Mortgage Corp. Notes 1.875% 11/17/20 12/06/17 5,885, ,854, Walmart Stores Inc. Corp. Notes 1.900% 12/15/20 10/20/17 3,400, ,378, US Treasury Notes 1.750% 12/31/20 10/16/17 1,130, ,122, Federal Home Loan Mortgage Corp. Notes 6.000% 06/01/21 06/22/06 79, , US Treasury Notes 1.125% 06/30/21 09/26/17 5,760, ,578, US Treasury Notes 1.125% 06/30/21 10/26/17 3,355, ,249, US Treasury Notes 1.125% 06/30/21 08/28/17 3,460, ,350, US Treasury Notes 1.125% 06/30/21 11/30/17 2,800, ,711, Federal National Mortgage Assn % 11/01/21 11/16/06 67, , Federal Home Loan Mortgage Corp. Notes 5.500% 02/01/22 04/10/07 92, , Fannie Mae Pool 3.000% 06/01/22 08/17/12 410, , Federal Home Loan Mortgage Corp. Notes 6.000% 07/01/22 07/17/07 40, , GNMA Pool # % 01/01/27 04/16/13 614, , GNMA Pool # % 03/01/27 04/16/13 363, , GNMA Pool #MA % 04/01/27 06/18/12 1,003, ,029, Fannie Mae Pool # % 06/01/32 07/17/12 1,001, ,041, BB&T Trust Deposit Variable Not Fixed 352, , Money Rate Savings Account Variable Not Fixed 223, , ,133, ,733, Total All Investments $ 447,734, ,956,

9 Vehicular Traffic Statistics DESCRIPTION/CLASS CURRENT YEAR 3 Months 6 Months 12 Months October November December Ended Ended Ended Cars/Light Trucks: /31/17 12/31/17 12/31/17 Class 1 229, , , ,088 1,699,585 3,006,152 Class 1 Round Trip 30,129 30,107 30,260 90, , ,891 Class 1 Commuter 15,589 15,116 14,009 44,714 89, ,523 Class 2 2,797 1,882 1,445 6,124 19,213 32,408 Class 2 Round Trip ,876 3,478 Class 3 4,072 2,537 2,000 8,609 23,280 40,488 Class 3 Round Trip ,964 3,829 Class ,112 2,056 Class 4 Round Trip Sub Total 282, , , ,270 2,028,090 3,624,027 Heavy Trucks: Class 9 5,078 4,542 3,852 13,472 29,663 56,962 Class 10 1,679 2,163 1,783 5,625 11,024 20,334 Class 11 1,244 1, ,045 7,276 14,345 Class 12 23,962 23,521 21,025 68, , ,345 Class ,895 3,389 Class ,019 Sub Total 32,310 31,676 27,802 91, , ,394 Buses: Class ,629 Class Class ,637 5,596 11,452 Sub Total 1,145 1, ,149 6,755 13,807 Totals 316, , , ,207 2,222,026 3,999,228 DESCRIPTION/CLASS PRIOR YEAR 3 Months 6 Months 12 Months October November December Ended Ended Ended Cars/Light Trucks: /31/16 12/31/16 12/31/16 Class 1 223, , , ,039 1,711,342 3,003,436 Class 1 Round Trip 29,130 28,936 29,992 88, , ,389 Class 1 Commuter 13,958 13,798 13,652 41,408 80, ,186 Class 2 2,481 1,873 1,531 5,885 18,975 32,306 Class 2 Round Trip ,736 3,190 Class 3 3,267 2,354 2,039 7,660 21,743 37,325 Class 3 Round Trip ,735 3,344 Class ,022 1,905 Class 4 Round Trip Sub Total 273, , , ,086 2,021,716 3,589,266 Heavy Trucks: Class 9 4,810 4,449 4,065 13,324 29,627 56,171 Class 10 1,645 1,510 1,382 4,537 9,532 19,730 Class 11 1,258 1, ,263 7,657 14,893 Class 12 21,571 22,379 20,253 64, , ,334 Class ,349 2,916 Class Sub Total 29,589 29,648 26,801 86, , ,032 Buses: Class ,569 Class Class 15 1,201 1,194 1,100 3,495 7,131 13,365 Sub Total 1,382 1,357 1,253 3,992 8,228 15,736 Totals 304, , , ,116 2,212,998 3,960,034 9

10 (1) Organization and Summary of Operations The Chesapeake Bay Bridge and Tunnel District (the District) was created as a political subdivision of the Commonwealth of Virginia by Chapter 693 of the Acts of Virginia of Chapter 693 was subsequently amended by the following Chapters of the Acts of Virginia: Chapters 462 and 714 of the 1956 Session, Chapter 24 of the 1959 Extra Session, Chapters 228 and 605 of the 1962 Session, Chapter 348 of the 1964 Session, Chapter 203 of the 1990 Session, Chapter 548 of the 1998 Session, Chapters 238 and 705 of the 2000 Session, and Chapters 270 and 297 of the 2005 Session, (collectively, the Acts). All such Acts have been codified into Title 33.2 Code of Virginia, Chapter 22. The District comprises the area, all within the Commonwealth of Virginia, in Accomack and Northampton Counties, the Cities of Virginia Beach, Hampton, Newport News, Chesapeake, Norfolk, and Portsmouth, and the area of the Chesapeake Bay between these subdivisions. By the Acts, the Chesapeake Bay Bridge and Tunnel Commission (the Commission) was created as the governing body of the District. These Acts authorized the Commission to acquire, establish, construct, maintain, repair, and operate a project comprising public ferry service over and across the waters between any two points within the boundaries of the District, where such public ferry services would form a connecting link in the system of state highways. Under the Acts, the Commission was also authorized to establish, construct, maintain, repair, and operate a bridge or tunnel or a bridge and tunnel project from any point within the boundaries of the District to a point in the County of Northampton, including such approaches and approach highways as the Commission deemed necessary to facilitate the flow of traffic in the vicinity of such project or to connect such project with the highway system or other facilities in the state. The Chesapeake Bay Bridge and Tunnel (the Bridge-Tunnel) is a 20-mile, four-lane trestle and bridge and two-lane tunnel crossing at the mouth of the Chesapeake Bay between the City of Virginia Beach and Northampton County on the Eastern Shore of Virginia. The Bridge-Tunnel consists principally of low-level trestles, four bridges, two tunnels, approach highways, and an earth-fill causeway. The Bridge-Tunnel is designated as part of U.S. Route 13, the main north-south highway on Virginia s Eastern Shore and the only direct link between Virginia s Eastern Shore and the metropolitan area of south Hampton Roads, Virginia. The District sold a revenue bond issue of $200,000,000 (1960 Bonds) under a Trust Indenture dated July 1, 1960, and constructed the two-lane bridge and tunnel project. The project was opened to traffic on April 15, The Commission discontinued ferry service following the opening of the two-lane bridge and tunnel project. On April 15, 1964, the Bridge-Tunnel opened as a two-lane facility. A three-staged parallel crossing project began in Stage 1 of this project was completed in April This stage included construction of parallel trestles, bridges, roadways, and rehabilitation of the original two-lane facility. Stage 2 is ongoing and will consist of construction of an additional two-lane tunnel under Thimble Shoal Channel. Stage 3 will complete the parallel crossing with construction of an additional two-lane tunnel under Chesapeake Channel. 10

11 (2) Summary of Significant Accounting Policies The District is accounted for under the economic resources measurement focus and the accrual basis of accounting as a special-purpose government engaged in business-type activities, which follows enterprise fund reporting. Special-purpose governments engaged in business-type activities are used to account for the ongoing activities that are financed and operated similar to those often found in the private sector. Accordingly, revenues are recognized in the period earned and expenses are recognized when they are incurred. The District distinguishes operating revenues and expenses from nonoperating items. Operating revenues and expenses generally result from the District s ongoing operations. Operating revenues include revenue from toll collection, recognized when travelers cross the bridge and tunnel, and lease income. Operating expenses include District facility and administrative expenses. All revenues and expenses not meeting these definitions are reported as nonoperating revenues and expenses. The statements of net position reports all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and the residual net position of the District. Deferred outflows of resources are defined as a consumption of net position by the District that is applicable to a future reporting period. Similarly, deferred inflows of resources are defined as an acquisition of net position by the District that is applicable to a future reporting period. (a) Cash and Investments Cash includes cash on hand and various checking accounts. In accordance with GAAP, the District reports its investment securities at fair market value. Fair market value is determined as of the statements of net position date. The fair value is based on either quotations obtained from national security exchanges or on the basis of quotations provided by a pricing service, which uses information with respect to transactions on bonds, quotations from bond dealers, market transactions in comparable securities, and various relationships between securities. (b) Restricted Assets In accordance with applicable covenants of certain bond issues, cash, investments, and accrued interest receivables have been appropriately restricted. When both restricted and unrestricted resources are available for use, it is the District s policy to use restricted resources first, and then unrestricted resources, as they are needed. (c) Capital Assets The bridge and tunnel assets are stated at cost and include capitalized interest. No provision for depreciation or obsolescence of the Bridge-Tunnel facilities is provided as the District has adopted the modified approach to account for these assets. Nonbridge and tunnel assets are being depreciated over their estimated useful lives of 3 years up to 50 years. (d) Restricted Net Position Restricted net position, as defined by GAAP, is reported when constraints are placed on the use of assets either externally by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling 11

12 legislations. At and 2016, the District had net position restricted for debt service of $61,936,728 and $63,603,105, respectively. (e) Management s Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and deferred outflows and liabilities and deferred inflows and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (f) Revenue Recognition Toll revenues represent the tolls collected, net of any deductions such as credit card fees, EZ Pass fees and medical and educational toll discounts. Revenues are recognized when earned. (g) Pensions For purposes of measuring net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the District s Retirement Plan and the additions to/deductions from the District s Retirement Plan s net fiduciary position have been determined on the same basis as they were reported by the Virginia Retirement System (VRS). For this purpose, benefit payments (including refunds of employee contributions) are recognized when due and payable in accordance with the benefit terms. Investments are reported at fair value. (h) New Accounting Pronouncements During FY2017, the Governmental Accounting Standards Board issued GASB Statement No. 86, Certain Debt Extinguishment Issues. The objective of GASB Statement No. 86 is to improve consistency in accounting and financial reporting for in-substance defeasance of debt by providing guidance for transactions in which cash and other monetary assets acquired with only existing resources resources other than the proceeds of refunding debt are placed in an irrevocable trust for the sole purpose of extinguishing debt. The District incurred such a transaction on November 10, 2016 with the early defeasance of the General Resolution Series 1998 Bonds. Although Statement No. 86 has a required effective date for periods beginning after June 15, 2017, the District has elected to implement the Statement early due to a lack of other existing guidance. More information regarding the defeasance transaction can be found in note 5. (3) Cash Deposits and Investments (a) Deposits The carrying value of the District s deposits (unrestricted and restricted) was $1,101,233 and $826,534 at and 2016, respectively. The entire bank balance was covered for both fiscal years by federal depository insurance or collateralized in accordance with the Virginia Security for Public Deposits Act (VSPD Act). In accordance with the VSPD Act, the District s depository institution pledged 12

13 collateral in the form of federal agency obligations with a market value equal to 110% of the District s deposits with a third-party trustee in the name of the Treasurer of the Commonwealth of Virginia. In the event that the banking institution fails, the Treasurer will take possession of the collateral, liquidate it, and reimburse the District up to the value of its deposits. The State Treasury Board is responsible for monitoring compliance with the collateralization and reporting requirements of the VSPD Act and for notifying local governments of compliance by banks. (b) Investments The District is authorized to invest in obligations of the United States or agencies thereof; obligations of any state or territory of the United States and any political subdivision thereof; obligations permitted by the laws of the Commonwealth of Virginia; repurchase agreements with respect to the foregoing obligations; certificates of deposit, time deposits, or interest in money market portfolios issued by any bank, banking association, savings and loan association, or trust company insured by the FDIC or Federal Savings and Loan Insurance Corporation; commercial paper, shares in one or more open-ended investment funds provided that the funds are registered under the State Securities Act or the Federal Investment Company Act; bankers acceptances; and units representing beneficial interests in investment pools created pursuant to the Government Non-Arbitrage Investment Act of the Commonwealth of Virginia. (c) Credit Risk Credit risk is defined as the risk that an issuer or other counterparty to an investment will not fulfill its obligations. As required by state statute, the policy requires that commercial paper have a short-term debt rating of no less than A-1 (or its equivalent) from at least two of the following: Moody s Investors Service, Standard & Poor s, Fitch Investors Service, and Duff and Phelps. Corporate notes, negotiable certificates of deposit, and bank deposit, notes maturing in less than one year must have a short-term debt rating of at least A-1 by Standard & Poor s and P-1 by Moody s Investors Service. Notes having a maturity of greater than one year must be rated AA by Standard & Poor s and Aa by Moody s Investors Service. The District s investment securities using the Standard & Poor s credit quality ratings scale are presented below: As of Standard & Poor's Credit Rating Investment type AAA AA+ AA AA- A+ A-1 Total U.S. Treasuries $ 54,877,364 54,877,364 U.S. A gencies 115,411, ,411,764 Federal Agency M ortgage-backed 3,782,480 3,782,480 Supra-National Agency 4,966,542 4,966,542 State and Local Govt 6,806,781 6,806,781 Certificate of Deposit 6,374,079 6,374,079 Commercial Paper 14,466,367 14,466,367 Corporate Notes 2,881,694 12,564,822 6,176,044 6,156,427 3,633,283 3,718,073 35,130,343 Total $ 14,655, ,636,430 6,176,044 12,530,506 3,633,283 18,184, ,815,720 13

14 (d) Concentration of Credit Risk The District s investment policy establishes guidelines on portfolio composition by investment type in order to control concentration of credit risk. As of, the District s portfolio was invested as follows: 2017 Percentage Investment type Fair value of portfolio U.S. Treasuries $ 54,877, % U.S. Agencies 115,411, Federal Agency Mortgage- Backed 3,782, Supra-National Agency 4,966, State and Local Government 6,806, Certificate of Deposit 6,374, Money Market Funds 203,140, Commercial Paper 14,466, Corporate Notes 35,130, $ 444,956, % (e) Interest Rate Risk Interest rate risk is defined as the risk that changes in interest rates will adversely affect the fair value of an investment. The District s investment policy limits the investment of funds as a means of limiting exposure to fair value losses. Investments in the General Resolution General Fund are limited to investments with maturities that are consistent with the schedule of planning, development, and construction of parallel tunnels that would complete the parallel crossing. Investments are selected based on the current perception of the direction of interest rates with a greater emphasis on yield and a lesser emphasis on liquidity. Proceeds from the sale of bonds issued by the District are invested in compliance with the specific requirements of the bond covenants without further restriction as to the maximum term of securities purchased. 14

15 As of, the District had the following investments and maturities: Investment maturities (in years) Fair Less Greater Not Investment type value than 1 year 1 to 3 years than 3 years fixed U.S. Treasuries $ 54,877,364 5,240,095 20,870,939 28,766,330 U.S. Agencies 115,411,764 13,024, ,387,349 Federal Agency Mortgage-Backed 3,782,480 3,782,480 Supra-National Agency 4,966,542 4,966,542 State and Local Govt 6,806,781 6,806,781 Commercial Paper 14,466,367 14,466,367 Certificates of Deposit 6,374,079 6,374,079 Money Market Funds 203,140, ,140,778 Corporate Notes 35,130,343 15,927,971 19,202,372 Total $ 444,956,498 55,465, ,801,281 32,548, ,140,778 (f) Summary of Changes in Fair Value of Investments The calculation of realized gains and losses is independent of the calculation of the change in fair value (including purchases and sales) that occurred during the year. Realized gains and losses on investments that were held by the District during previous years, but sold during the current year, were used to compute the change in fair value of investments for the previous year as well as the current year. The change in fair value of investments for the quarter ended is calculated as follows: Q2 FY18 Fair value of investments at end of quarter $ 444,956,498 Add: Proceeds from sales and maturities during the quarter 137,131,177 Less: Cost of investments purchased during the quarter (118,200,155) Fair value of investments at beginning of quarter (465,164,679) Change in fair value of investments $ (1,277,159) (4) Capital Assets Capital assets include bridge and tunnel assets, capitalized interest and financing expenses, and other capital assets. The bridges, trestles, approach roads, Fisherman Island Causeway, tunnels, portal islands with all attached improvements, toll plaza infrastructure and the rest area facility, and site-wide utilities are classified as bridge and tunnel assets. Capitalized interest and financing expenses include the amount of money that was funded from the 1960 Bonds issued for debt service and associated costs of the bonds 15

16 during construction until the opening of the Bridge-Tunnel in Miscellaneous capital assets include all other assets that the District has capitalized such as land, buildings, fleet vehicles, and equipment. The District utilizes the modified approach to infrastructure reporting on bridge and tunnel assets and capitalized interest and financing expenses. In lieu of reporting depreciation on bridge and tunnel assets, the costs incurred for maintaining bridge and tunnel assets at the condition level that is specified by Commission policy are reported as preservation expenses on the accompanying statements of revenues, expenses, and changes in net position. The District has elected to continue to use the traditional approach or depreciation method for buildings, fleet vehicles, and equipment that are depreciable, as stipulated in the District s Capital Asset Policy. U.S. generally accepted accounting principles (GAAP) requires that governmental entities that utilize the modified approach for infrastructure reporting must have their governing board set a policy for the condition levels at which modified approach assets will be maintained. GAAP also requires that a third party perform condition level assessments of the modified approach assets annually and that the condition levels for the current and prior two fiscal years be disclosed in the notes to the financial statements. The Commission s preservation policy is to maintain 90% of the bridge and tunnel assets at a maintenance rating program (MRP) condition level of good or better. Jacob s Engineering, Inc., the District s consulting engineer, has inspected the District s bridge and tunnel assets. Jacob s Engineering, Inc. determines the MRP condition level for the bridge and tunnel assets as a numeric scaled rating. The numeric scaled rating is based on a condition index utilized by the Virginia Department of Transportation whereby 0 is a failed condition level and 9 is an excellent condition level. The table below defines the numeric scaled ratings assigned by Jacob s Engineering, Inc.: MRP Numeric code scale Numeric Narrative code code Definition 9 Excellent Component/Element has been recently put in service or remains in new condition 8 Very Good No problems noted, potential exists for minor preventative maintenance 7 Good Potential exists for minor maintenance 6 Satisfactory Potential exists for major maintenance 5 Fair Potential exists for minor repair or rehabilitation 4 Poor Potential exists for major repair or rehabilitation 3 Serious Major repair or rehabilitation required 2 Critical The need for repair or rehabilitation is urgent. Component/Element should be taken out of service until indicated repair is complete. 1 Imminent Failure Component is out of service; study feasibility for repair or rehabilitation 0 Failed Component is out of service and beyond repair, replacement required 16

17 The following two tables derive percentages in different ways. Trestles and bridges that have an MRP numeric condition level are described as a percentage of lane miles. All other bridge and tunnel assets that have an MRP numeric condition level are described as a percentage of that specific bridge and tunnel asset. The following tables detail the MRP condition level of bridge and tunnel assets for the last three years: Percentage of capital assets at an MRP condition Level 7 or better Bridge and tunnel assets Approach roads 100% 100% 100% Fisherman Island Causeway Tunnels Portal islands Toll plaza infrastructure Site-wide utilities Percentage of land miles at an MRP condition Level 7 or better Bridge and tunnel assets Original bridges 100% 100% 100% Parallel crossing bridges Original trestles Parallel crossing trestles (5) General Resolution Revenue Bonds Bond activity for the six months ended Q2 FY18 was as follows: Amortization Balance, of costs, Balance, A mounts due September 30, Bond premiums, Bond December 31, within 2017 proceeds discounts, net payments 2017 one year 2016 First Tier General Resolution Revenue Bonds$ 360,901,839 (383,939) 360,517,900 $ 360,901,839 (383,939) 360,517,900 The District had previously incurred its General Resolution Revenue Bonds, Series 1998, Series 2010A and Series 2011A (collectively, the Prior Bonds ) under its General Revenue Bond Resolution, adopted 17

18 by the Commission on November 21, 1991, as amended and supplemented (the 1991 Resolution ). In July 2016, the Commission awarded a contract to Chesapeake Tunnel Joint Venture to design and build the Parallel Thimble Shoal Tunnel Project (the Project ); and to finance the costs of the Project, the Commission determined that the Prior Bonds would be redeemed or defeased and the 1991 Resolution would be terminated so that a new general bond resolution could be issued. The District redeemed the Series 2010A and Series 2011A Bonds and terminated the interest rate swap associated therewith on November 1, Concurrently with the issuance of the Series 2016 Bonds, the District contributed additional monies in combination with funds released from the 1991 Resolution to fund the defeasance of the Series 1998 Bonds, which are non-callable, on November 10, On October 24, 2016, the Commission adopted and approved a new General Revenue Bond Resolution (the 2016 Resolution ) along with three Supplemental Resolutions authorizing the issuance of $321,515,000 First Tier General Resolution Revenue Bonds, Series 2016 (the Series 2016 Bonds ), a loan from the United States Department of Transportation under the TIFIA program (the TIFIA Loan ) in the amount of up to $338,528,672, plus capitalized interest and a loan from the Virginia Transportation Infrastructure Bank (the VTIB Loan ) in the amount of up to $50,000,000, plus capitalized interest. The Series 2016 Bonds are term bonds maturing from July 1, 2041 through July 1, 2055 with coupon interest rate of 4.0% to 5.0%. The proceeds from the Series 2016 Bonds, along with the proceeds of the TIFIA Loan and VTIB Loan and cash contributed by the District will be utilized to finance the develoment and construction of the Parallel Thimble Shoal Tunnel Project. The remaining portion of the proceeds from the Series 2016 Bonds will be utilized to (i) pay capitalized interest on a portion of the Series 2016 Bonds to and including July 1, 2021, (ii) to obtain a municipal bond debt service reserve insurance policy for the Series 2016 Bonds, and (iii) to pay the related issuance expenses, including bond insurance premiums. The Series 2016 Bonds are subject to optional redemption prior to maturity by the District on or after July 1, 2026, in whole or in part, at par plus accrued interest. The Series 2016 Bonds are subject to mandatory sinking fund redemption in part prior to maturity on July 1 of each year starting in The 2041 Term Bond and the 2055 Term Bond are insured by Assured Guaranty Municipal Corporation. The Series 2016 Bonds Debt Service Reserve Fund Requirement of $24,774,566 is secured by a debt service reserve fund policy also issued by Assured Guaranty Municipal Corporation. The TIFIA Loan and the VTIB Loan are issued on the Subordinate Lein of the 2016 Resolution and bear interest rates of 2.88% and 2.90%, respectively. The loans do not incur interest until drawn which is in the Fall of Both loans have first semi-annual interest repayments commencing January 1, 2021 and first annual principal repayments commencing on July 1, Final repayment on both loans is July 1, The underlying credit rating on the Series 2016 Bonds is Baa2 and BBB by Moody s Investors Service and S&P Global Ratings, respectively. The TIFIA Loan is also rated Baa2 and BBB by Moody s Investors Service and S&P Global Ratings, respectively. The VTIB Loan is unrated. 18

19 The bond premiums for General Resolution Revenue Bonds are being accreted using the straight-line method, which is not materially different from using the effective-interest method, over the period the bonds will be outstanding. Tolls and other revenues derived from the operation of the Bridge-Tunnel are pledged as security for the General Resolution Revenue Bonds. The General Revenue Bond Resolution includes covenants such as minimum toll rate covenant ratios and minimum debt service reserve requirements. Maturities of bond principal and interest to be paid in subsequent fiscal years for all bonds outstanding at were as follows: General General resolution resolution revenue revenue bonds bonds Fiscal year principal interest ,912, ,912, ,912, ,912, ,825, ,515, ,065,800 $ 321,515, ,543,050 For the fiscal year ended December 31, 2016, the District identified two outstanding interest rate exchange agreements (i.e., interest rate swaps) that qualified as derivative instruments under GAAP. The 2004 Fixed Rate Swap was a pay-fixed, receive variable interest rate swap that was entered into as a cash flow hedging derivative instrument with the objective of hedging the District s exposure to change in the overall cash flows of its variable rate debt. The objective of the overall transaction was to lower the District s borrowing costs by achieving a lower interest rate than could have been obtained by issuing fixed-rate debt. The 2006 Constant Maturity Swap was a pay-variable, receive-variable interest rate swap that was entered into as an investment derivative instrument with the expectation that over time the variable receipt based on the long-term rate of 10-year LIBOR would more than offset the short-term rate paid to bondholders of the variable rate debt. On November 1, 2016, the variable rate debt (the Series 2010A and Series 2011A Bonds) associated with the two interest rate swaps was redeemed and both swaps were terminated. The termination payment made to Deutsche Bank AG was $2,553,000. The net loss on swap termination recognized by the District as a component of investment losses was $1,251,

20 (6) Fair Value Measurements The District utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The District determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at measurement date. Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantively the full term of the asset or liability. Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identified assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The level in the fair value hierarchy within which a fair value measurement, in its entirety falls in, is based on the lowest level input that is significant to the fair value measurement in its entirety. Portfolio investments are assigned a level based upon the observability of the inputs which are significant to the overall valuation. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. All of the District s investments in debt securities are in one of the four categories below and therefore the entire portfolio of debt securities is Level 2. Debt securities classified in Level 2 are valued using the following approaches: U.S. Treasuries, U.S. Agencies, and Supra-Nationals: quoted prices for similar securities in the market are used to draw appropriate correlations; Corporate Notes and Municipal Bonds: relevant trade data, benchmark quotes and surveys of the dealer community are incorporated into the evaluation process; Certificates of Deposit: matrix pricing based on various market makers and dealers; Federal Agency Mortgage-Backed: solicited prices from market buy and sell side sources, including primary and secondary dealers, portfolio managers and research analysts are used. The fair value of investments in money market funds is based on the published net asset values per share of those funds.the District has the following recurring fair value measurements as of : 20