Fitch Ratings assigns an 'AA-' rating to the following North Slope Borough, Alaska general obligation (GO) bonds:
--$35 million GO bonds, series 2011A.
The bonds will be sold via negotiation on Feb. 22, 2011.
In addition, Fitch affirms the following ratings:
--$462.4 million outstanding borough general obligation bonds at 'AA-'.
The Rating Outlook is Stable.
RATING RATIONALE:
--The borough's tax base benefits from: the
significant production of oil and gas, which are both essential
commodities; increasing geographic, producer, and product
diversification; and ongoing public and private sector investment.
--Nevertheless,
the tax base is subject to volatility and is highly concentrated on
naturally declining oil and gas reserves.
--The borough's financial
position is sound, bolstered by a permanent fund, an increased share of
mill rates paid by oil and gas companies, and a large unreserved general
fund balance.
--The borough's debt amortizes rapidly, well within
the lifespan of the borough's existing oil fields; overall debt levels
have been decreasing significantly.
--While the borough's operating
budget tax cap is limited by a state formula, the borough is currently
benefiting from increases in its population and per capita average full
property tax value.
KEY RATING DRIVERS:
--Ongoing fiscal prudence to ensure the
borough's future financial health when oil and gas production declines;
--Maintenance
of a strong permanent fund as the borough's primary financial cushion.
SECURITY:
The bonds are general obligations of the borough with a
full faith and credit pledge, payable from ad valorem property tax
revenues. The ad valorem property tax is levied without limitation as to
rate or amount.
CREDIT SUMMARY:
North Slope Borough is located largely in the North
Slope region of Alaska, encompassing 94,877 square miles of which 88,817
square miles is land and 5,946 square miles is water. The borough's
modest population of 17,520 is comprised of year round residents and
seasonal workers from the oil and gas industry. Recently, the borough's
economy has strengthened, as evidenced by a sizable 10.3% increase in
assessed value between fiscal years 2009 and 2010, a low unemployment
rate, and a stable housing market. Moreover, oil and gas companies, the
borough's largest employers, have continued their strong fiscal
performance throughout the economic downturn. Overall debt levels have
decreased significantly since their peak in the 1980s, while the
borough's debt amortizes rapidly, well within the lifespan of the
borough's existing oil and gas fields. Taxpayer concentration remains
very high, with the top 10 taxpayers equaling a high 94.5% of fiscal
2010 assessed valuation.
The borough's economy depends almost entirely on the oil and gas industry. BP plc (Issuer Default Rating 'A' with a Stable Outlook) and ConocoPhillips (Issuer Default Rating 'A' with a Stable Outlook) continue to dominate oil production in the borough, together accounting for 73% of the borough's assessed valuation. The increased exploration of oil fields across the borough and surrounding ocean, the participation of more second tier oil and gas companies, and the prospect of huge gas reserves in the North Slope might offset the eventual production decline resulting from the maturing of the Prudhoe Bay oil field. Nevertheless, the tax base is subject to volatility and is highly concentrated on a naturally declining oil and gas reserve that is expected to result in assessed valuation declines over the long term.
In recent years, solid revenue growth and prudent management practices have enabled the borough to preserve its sound financial position. For fiscal 2010, the borough's projected unreserved general fund balance is expected to increase to approximately $78 million from $72.7 million (20% of spending) in fiscal 2009 results. Moreover, the borough's financial position is strengthened by additional reserves readily available, if needed, from the permanent fund and an increased share of mill rates paid by oil and gas companies. While the borough's permanent fund was significantly hit by investment losses over the past couple of years, it is estimated to equal a still large $414.7 million at the end of fiscal 2010, a $20 million increase from fiscal 2009. In addition, the borough's operating budget tax cap threshold has risen due to increases in its population and per capita assessed valuation, despite limitations imposed by the state formula. Fitch view positively management's demonstrated ability to maintain strong fund balance levels.
The borough's property tax revenues are primarily generated by the oil and gas industry, both essential commodities. There is increasing geographic, producer, and product diversification, and both public and private sector investment is ongoing. The borough's main revenue source is property taxes, which are almost entirely derived from oil and gas production facilities but do not include the commodities extracted. Since revenues from the industry are derived from property tax revenues, as well as a flat annual amount of $5 million that has replaced sales tax revenues since 1991, the borough's receipts are not tied directly to oil and gas commodity prices, providing some protection against price volatility. While the borough permits an annual transfer from the permanent fund to the general fund of 8% of the previous three-years' average total fund value, historically the borough only transfers 5.5%. In fiscal 2010, the borough transferred only 4% and has budgeted to transfer only 4% in fiscal 2011 in an effort to keep the transfers as low as possible until the permanent fund balance is rebuilt. Management identified numerous projects that are in the planning phase that may generate an additional $1-$2 billion in assessed valuation over the medium term; however, this revenue stream was conservatively left out of the borough's financial forecast. Furthermore, the borough has not reduced expenditures but was able to increase its contribution to its local school district and college.
Including the current issue, direct debt is a very high $28,875 per capita due to the sparsely populated nature of the borough. This high debt level is largely mitigated by very rapid debt amortization, high assessed valuation (the debt is only 3.1% of taxable assessed valuation), and the fact that the majority of debt service costs are paid by oil and gas property tax revenues. The borough expects to issue approximately $40 million in debt annually through fiscal 2015. As of fiscal 2010, the borough has fully funded its other post employment benefit (OPEB) liability.
Additional information is available at 'www.fitchratings.com'.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope.
Applicable Criteria and Related Research:
'Tax-Supported Rating
Criteria', dated Aug. 16, 2010;
'U.S. Local Government
Tax-Supported Rating Criteria', dated Oct. 8, 2010.
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating
Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548605
U.S.
Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564566
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