RD202 - Virginia Port Authority Comprehensive Annual Financial Report for the Year Ended June 30, 2005


Executive Summary:
The Comprehensive Annual Financial Report (CAFR) of the Virginia Port Authority (the Authority) for the fiscal year ended June 30, 2005 is hereby submitted for your review. Responsibility for both the accuracy of the data and the completeness and fairness of presentation, including all disclosures, rests with the Authority. To the best of our knowledge and belief, the enclosed data is accurate in all material respects, and is reported in a manner designed to present fairly the financial position and results of operations of the Authority. All disclosures necessary to enable the reader to gain an understanding of the Authority's financial activities and operations have been included.

Certain statistical information included in the CAFR were not obtained from the financial records of the Authority but are presented for the CAFR user's information and understanding of the Authority and the environment in which the Authority operates.

The enclosed CAFR has been prepared in accordance with guidelines recommended by the Governmental Accounting Standards Board and the Government Finance Officers Association. The CAFR is presented in four sections:

1. Introductory Section - This section consists of this letter of transmittal and a list of Board of Commissioners as of fiscal year ended June 30, 2005.

2. Financial Section - This section includes the Independent Auditor's Report on the Authority financial statements for the fiscal year ended June 30, 2005, management's discussion and analysis, the financial statements for the same period, and the accompanying notes to the financial statements.

3. Statistical Section - This section includes selected statistical information and key performance indicator data. Information in this section includes selected cargo-related data, trading partner, and commodity data, as well as comparisons to other U.S. ports.

3. Compliance Section - This section includes supplementary information required for compliance with Security Exchange Commission Rule 15c2-12 which requires issuers of municipal securities to provide annual updates of selected financial information to a nationally recognized municipal securities information repository. It is the intent of the Authority to file this CAFR with the repositories to meet this requirement.

Overview of the Virginia Port Authority

The Virginia Port Authority was established in 1952 as a political subdivision of the Commonwealth of Virginia for the purpose of stimulating commerce of the ports of the Commonwealth, promoting the shipment of goods and cargoes through the ports, improving the navigable tidal waters ,within the Commonwealth, and in general to perform any act or function which may be useful in developing, improving, or increasing the commerce of the ports of the Commonwealth. The Authority owns and is responsible for the operations of three marine terminals: Norfolk International Terminals (NIT), Portsmouth Marine Terminal (PMT), and Newport News Marine Terminal (NNMT), and an inland intermodal facility, the Virginia Inland Port (VIP) located in Front Royal, Virginia. These facilities primarily handle import and export containerized, breakbulk, and bulk cargoes.

A Board of Commissioners composed of 12 members manages the Authority. The Commissioners consist of 11 citizens appointed by the Governor in addition to the State Treasurer who is an ex-officio member of the Board. While the Commissioners remain on the Board at the continuing pleasure of the Governor, they serve staggered five-year terms. Commissioners may serve a maximum of two consecutive terms.

In addition to the financial statements of the Authority, Virginia International Terminals, Inc. (VIT) is presented in the Authority's financial statements as a discrete component unit to emphasize that it is legally separate from the Authority, and that it serves or benefits those outside of the Authority. The financial statements of VIT were audited by other auditors.

VIT was established in 1982 to operate the facilities owned by the Authority. VIT is a non-stock, nonprofit corporation and has been determined by the Internal Revenue Service as fulfilling an essential governmental function and therefore enjoys tax-exempt status. VIT operates the state-owned ports through a Service Agreement with the Authority. VIT has a seven-member board of directors. Six members come from the port area and serve a single six-year term. The Executive Director of the Virginia Port Authority is a permanent member of the VIT Board. The Virginia Port Authority Board of Commissioners makes appointments to the VIT Board. The VIT budget is prepared annually and approved by the VPA Board of Commissioners prior to July 1 of each fiscal year.

Major Initiatives and Accomplishments

1. TEU (twenty-foot equivalent container unit) volume and increase from fiscal year (FY) 2004:

FY2004: 1,713,502
FY2005: 1,900,026 = 10.9% Increase

2. Increase in rail volume in fiscal year 2005:

FY 2004: 171,678 Containers
FY 2005: 196,726 Containers = 14.6% Increase

Change in rail container throughput for the Virginia Inland Port:

FY 2004: 20,826 Containers
FY 2005: 31,604 Containers = 51.8% Increase

3. Empty Container Depots:
Designed and constructed t\VO empty container depots with a total capacity of 8,000 TEUs. The empty yards freed-up an equal amount of valuable existing terminal space.

4. Centralized Chassis Pool:
Implemented a port wide chassis pool to consolidate ship line owned chassis in order to improve the safety of the equipment, save time for truckers, and to free up valuable terminal land. The centralized pool includes 16,000 chassis. In January 2005, 2,000 chassis were identified for removal from the terminal. This is the first centralized chassis pool in the U.S. and has been applauded by the truckers and the ship lines.

5. New shipline services:
Amerigo Express Service: CMA-CGM/CSCL/ANL/Hapag-Lloyd/Zim/Lloyd Triestino (Transatlantic)
Round-the-World Service: Norasia/CSCL/Zim/CMA-CGM
ECAS Service: Hanjin/"K"Line/MOL/Zim (US-Caribbean-Central America)
Mediterranean Express Service: Maersk Sealand/Hapag-Lloyd (Transatlantic)
TA3/Andean Service: Maersk Sealand (US-Caribbean-Central America)

6. New or expanded distribution centers:
Wal-Mart Stores, Inc
Cost Plus Inc.
International Paper
Banta Books
Basic Sportswear
Morningstar Foods
Evans Distribution Systems
Ferguson Enterprises, Inc.
Dollar General Corp.
Atlas Cold Storage

7. Norfolk International Terminal (NIT) - South Improvements:
Completed three of four sections of wharf reconstruction, the first phase of reconstruction of the area immediately behind the wharf, including the demolition of three warehouses and repaving for container storage, and the receipt of eight Suez-class container cranes, the largest container cranes in the world.

8. Command and Control Center:
Completed the construction of a Command and Control Center building to house surveillance and WMD monitoring equipment, dispatch facilities, and administrative functions to allow port police to secure the Authority's cargo terminals from potential terrorist attack and other criminal activity.

Internal Controls

The management of the Virginia Port Authority is responsible for establishing and maintaining internal controls over its operations. The Authority's internal controls are designed to provide management with reasonable, though not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition and that financial transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The concept of reasonable assurance recognizes that the costs of a control should not exceed the benefits likely to be derived therefrom and that the evaluation of the costs and benefits requires certain estimates and judgments by management.

All internal control evaluations occur within the above framework. Authority management strongly believes that the inherent financial accounting controls coupled with the ongoing independent financial audit performed by the Authority's independent financial auditors, the Auditor of Public Accounts, as well as numerous other audit functions performed by several goverl1lnental agencies, adequately safeguard assets and provide reasonable assurance of properly recorded financial transactions.

Financial Overview

The Virginia Port Authority has one fund to which all accounts are organized and accounted for as a single reporting entity, known as an Enterprise Fund. Enterprise funds are used to account for proprietary operations that are financed and operated in a manner similar to private business operations where the intent of the governing body is that all operating costs, i.e. expenses exclusive of depreciation, are funded primarily through user charges. The Authority's primary source of funding for its operations is through the net revenues generated from terminal operations and subsequently transferred from VIT and one lease in which the Authority assesses lease charges against the tenant of that property.

The Management Discussion and Analysis and the Basic Financial Statements, included in the Financial Section of this CAFR, are designed to provide the reader with a thorough understanding of the Authority's financial activities.

Budget
As a political subdivision of the Commonwealth of Virginia, the Virginia Port Authority is included in the Commonwealth's budget. Authority staff prepares and submit budget requests for each upcoming biennium to the Department of Planning and Budget (DPB) and the Governor based on expected revenues and expenses. The Governor submits the recommended budget for the Commonwealth to the General Assembly.

The General Assembly enacts appropriations for each year of a biennium for operating and capital expenditures. These appropriations provide summary expenditure limitations and are printed in the Appropriation Act. The appropriations are effective on July 1 of each year. The Authority Board of Commissioners gives final approval of the detailed budget prior to July 1.

Risk Management

The Virginia Port Authority, together with its component unit (VIT), maintains a comprehensive risk management program, the purpose of which is the maximum protection of the assets, customers and employees of the Authority, and the reduction of the cost of risk through an innovative and professional risk management program. It is the intent of the Authority that it be protected against accidental loss or losses that would significantly affect Authority personnel, property or the ability of the organization to continue to fulfill its responsibilities.

In accordance with the service agreement between VIT and the Authority, VIT maintains property and liability insurance on all terminal equipment and facilities. The Authority maintains property and liability insurance only on non-terminal assets and facilities. The Authority also maintains general liability, fiduciary liability, worker's compensation insurance and an umbrella policy.

Acknowledgements

Preparation of the Comprehensive Annual Financial Report (CAFR), as always, represents the combined effort of the entire Finance Department of the Virginia Port Authority and the Auditor of Public Accounts. Finally, we express our deepest appreciation to the members of the Virginia Port Authority Board of Commissioners for their continued guidance and leadership towards ensuring the fiscal integrity of the Virginia Port Authority.

Respectfully Submitted,

J. Robert Bray
Executive Director

Rodney W. Oliver
Director of Finance and
Treasurer to the Board