Fitch Rts Virginia Beach, Virginia's $28MM Wtr & Sewer Revs 'AA+'.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 14, 2002

Fitch Ratings has assigned a 'AA+' rating to the city of Virginia Beach, Virginia's approximately $28,000,000 water and sewer revenue bonds, series of 2002. The bonds are expected to sell competitively on October 29. Fitch Ratings affirms its 'AA+' rating on the city's $91.9 million in outstanding parity debt.

The 'AA+' rating is based on the system's conservative financial management, very low debt levels, superior infrastructure maintenance practices, and manageable capital demands. The system's credit features improved substantially during the 1990s with the successful acquisition of a new long-term water supply source about 100 miles west of the city at Lake Gaston, which straddles the Virginia/North Carolina border.

The Rating Outlook for the city of Virginia Beach's water and sewer revenues bonds is Stable. Fitch expects past trends of conservative financial management -- strengthened by recently adopted debt management policies -- and maintenance standards to continue. Capital demands are manageable within the city's prescribed growth areas. The city has won all previous judicial and regulatory challenges concerning Lake Gaston, its primary water supply source. Only apparently minor litigation remains outstanding, in which the city reportedly has strong legal prospects.

Current debt levels are low because the $155 million Lake Gaston project was cash funded, mainly through accumulated impact fees and rate revenues. The neighboring City of Chesapeake funded part of the project and owns one-sixth of the Lake Gaston supply. The City of Norfolk stores and treats Virginia Beach water pursuant to a contract in effect through 2030. The project cured a decades-long problem, allowing water conservation measures that had previously stalled economic development to be relaxed. To minimize the impact on the Roanoke River Basin and Lake Gaston during the drought now affecting much of the southeast, Virginia Beach has been buying a portion of its water supply from Norfolk. The immediate area is not experiencing shortages; Norfolk's water supply is derived from a number of sources that are at or close to normal levels. The incremental cost to Virginia Beach of purchasing water is minimal.

The system's financial flexibility is strong, with financial reserves at 594 days' operations at fiscal year-end 2001 and revenue bond coverage close to or exceeding 3.00 times (x) annually. Coverage is projected to narrow to a still strong 1.93x over the next few years, well in excess of the 1.15x rate covenant.

Future capital needs are quite manageable and customer growth is projected to be moderate. Lake Gaston should provide ample supplies for the city for decades. The lake could provide sufficient supply even under the current drought conditions, but the city chose to minimize the regional impact of the drought by limiting its withdrawals. Sewer treatment costs are borne by the multijurisdictional Hampton Roads Sanitation District and the city's storm water system, which is funded by a separate charge and secures debt rated 'AA+' by Fitch -- equivalent to both this rating and that for Virginia Beach's general obligation debt. Capital activities are now focused on the maintenance of water distribution and sanitary sewer collection systems. The city's feasibility consultant reports that facilities are in very good condition and well-maintained.

Credit risks are minor. 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. Water and sewer rates, including HRSD charges, are above regional and national means. Bond covenants with amendments to take effect after this issue are satisfactory.