Fitch Rates Virginia Beach, Virginia's Water & Sewer Revs 'AA+'.

WASHINGTON -- Fitch Ratings assigns an 'AA+' rating to the City of Virginia Beach, Virginia's approximately $91.7 million water and sewer system revenue and refunding bonds, series of 2005. The bonds are scheduled for negotiated sale through a syndicate led by Morgan Keegan & Company, Inc. during the week of Sept. 19. Fitch also affirms the 'AA+' rating on the city's $105.3 million outstanding parity water and sewer system revenue bonds. The Rating Outlook is Stable.

The 'AA+' rating is based on the system's solid financial position, very low debt levels, superior infrastructure maintenance practices, and manageable capital demands. Fitch Ratings expects that Virginia Beach will continue to emphasize long-term fiscal stability for the system through multiyear rate-making actions, adherence to conservative liquidity and debt service coverage policies, and comprehensive zoning controls that limit service extensions to prescribed areas of the city.

The rating also incorporates the possibility that Naval Air Station Oceana, the city's largest employer, could be realigned under the Base Realignment and Closure (BRAC) process now under way. Jet fighter activities, the chief mission at Oceana, would be moved to Florida in coming years unless the city agrees by March 2006 to certain conditions, primarily the acquisition and clearing of property around the periphery of the base. While the base itself is not served by city utilities, about 3,000 residential units near the base would have to be moved if the BRAC commission's recommendations are approved and the city accepts the conditions. Fitch believes that not all of these customers would leave the city and that a modest near-term customer loss is sustainable at the current rating level given the system's sound financial condition. Additionally, redevelopment prospects for the oceanfront base appear to be good, assuming timely environmental remediation. Fitch will closely monitor the BRAC process and the city's evaluation of its options.

The system's credit features improved substantially during the 1990s with the successful acquisition of a new water supply source about 100 miles west of the City at Lake Gaston, which straddles the Virginia/North Carolina border. The City of Norfolk stores and treats this water for Virginia Beach pursuant to a contract in effect through 2030. All legal and regulatory matters surrounding the project have been resolved and long-term permits are in place. The Lake Gaston supply allows the city to relax water conservation measures that had previously stalled economic development.

The system's financial flexibility is strong, with financial reserves at 409 days of operations at the end of fiscal 2004 and revenue bond coverage exceeding 2.00 times (x) annually. Coverage is projected to grow to 2.5x over the next few years, excluding any true-up payments, well in excess of the 1.15x rate covenant. The forecast considers service fee and commodity-charge increases already approved through fiscal years 2007 and 2010, respectively.

Current debt levels are low because the $155 million Lake Gaston project was cash funded, mainly through accumulated impact fees and rate revenues. Future capital needs are quite manageable, and customer growth is projected to be modest, assuming Oceana's continued presence. Lake Gaston should provide ample supplies for the city for decades. Sewer treatment costs are borne by the multijurisdictional Hampton Roads Sanitation District (HRSD) and a separate stormwater system, which is funded by a separate charge and secures debt rated 'AA+' by Fitch equivalent to both this rating and that of Virginia Beach's general obligation debt. Capital activities are now focused on the maintenance of water distribution and sanitary sewer collection systems. The city expects to sell $108 million of system revenue bonds through fiscal 2011, excluding this issue. The city's feasibility consultant reports that facilities are in very good condition and well maintained. Water and sewer rates, including HRSD charges, are above state and national means, but in line with the region.

Virginia Beach is the commonwealth's largest city. A broadening of the city's economic base beyond its largest traditional components, the Hampton Roads region's huge military presence and tourism, continues but is not yet fully realized. Unemployment is low, and income levels are near national averages.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.