Fitch Rates Virginia Port Authority's Rev Rfdg Bonds 'A+'; Outlook Stable

Business Wire, Feb 9, 2007

NEW YORK -- Fitch assigns an 'A ' rating to the Virginia Port Authority's (the authority) approximately $88 million port facilities revenue refunding bonds, series 2007, scheduled for negotiated sale on or about March 13, 2007 through a syndicate led by Morgan Keegan & Company, Inc. Fitch also affirms the 'A ' rating on the authority's $142.8 million of outstanding port facilities revenue bonds. The Rating Outlook on all bonds is Stable. Bond proceeds will refinance the authority's 1997 port revenue bonds. The bonds are secured by net revenues generated from port operations.

The 'A ' rating reflects the authority's consistently sound financial performance, growing container-based trade activity, balanced level of activity between imports and exports, and diverse mix of both shipping lines and trading partners. It also incorporates the port's favorable geographic location and facilities, which offer several advantages over competing East Coast ports. Credit concerns center on the authority's extensive capital improvement plan and the competitive East Coast port environment. The authority also faces the departure in 2009 of a shipping line that represented 10% of fiscal 2005 revenues. However, it is Fitch's opinion that the expansion of the logistics and distribution industry in Virginia and nearby North Carolina, improving rail connections to the South and Midwest, the port's unique ability on the East Coast to accommodate the largest cargo ships, and the strong growth prospects for port traffic are important offsets. Additionally, the authority's conservative approach to leverage and forecasting and the continued support of the Commonwealth via the Transportation Trust Fund (TTF), should allow the port to maintain its sound financial performance.

The highly competitive environment on the East Coast represents a credit concern, as shipping lines have significant flexibility to redirect cargo on an ongoing basis. However this concern is mitigated by the port's natural advantages including a 50-foot deep channel that requires minimal dredging, on-dock rail and excellent rail access to interior destinations, which favor the maintenance of its current market share. The port also benefits from the region's growth as a distribution center, enhancing the port's importance in the logistical operations of prominent national retailers. Trade at the port has grown at a strong rate over the past decade. Container and break-bulk cargo tonnage increased 4% in fiscal 2006 and 5.6% on average annually since fiscal 1995.

Solid cargo growth and increasingly efficient operations have produced solid financial results, with debt service coverage provided by the authority's annual net revenues rising to 3.95 times (x) in fiscal 2006 (June 30 year-end) from 2.28x in fiscal 2004. The authority's recent ability to garner 10-year contracts with shipping lines, which include minimum annual guarantees and escalation clauses in regard to both volume and revenue, increases the predictability of its revenue stream. The authority is expecting to lose approximately 10% of its revenue base in fiscal 2009-2010 as the leases related to APM/Maersk (Maersk) expire and that entity shifts its operations to its new self-financed private terminal facility. While the authority will lose revenue and will face some competition from the new facility, the long-term affect of Maersk's departure should be mitigated by the expected growth in overall seaborne trade in the Hampton Roads Harbor area and demand for space from other shipping lines at authority facilities.

The authority has finalized a master capital improvement plan (CIP) which will address capacity needs at the port through 2032. Given, in part, independent estimates which forecast eastern seaborne trade to double by 2020, the authority has embarked on a program to create a fourth container terminal estimated to cost $2.2 billion. The CIP totals $2.9 billion when projects at the existing ports are factored in. Port facilities revenue bonds are expected to fund 29% of the total

CIP, while commonwealth port fund bonds (26%), authority pay-go (30%) and various federal and state grants will fund the remainder. Given the long lead time required to construct the new facility on harbor landfill, leverage must be undertaken well in advance of initial project revenues from the new terminal. The authority's financial forecasts, which includes the impact of Maersk, the initiation of the development of the CIP, and conservatively estimates the growth rate in container traffic at 4.1%, compared to a historical rate of 8.2%, shows that coverage levels will approach the 1.50x level in 2011. However, Fitch notes that should cargo traffic grow in line with recent trends, the authority's financial position and coverage levels could exceed this forecasted level.

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