Fitch Ratings has assigned an 'AA-' rating to the following North Slope Borough, Alaska (the borough) general obligation (GO) bonds:
--$74.3 million GO bonds, series 2011B.
The bonds will be sold via negotiation on or about the week of Oct. 18. The proceeds will fund the borough's ongoing capital improvement program, including the drilling of new natural gas wells for the city of Barrow.
In addition, Fitch affirms its 'AA-' rating on the following debt:
--$408.9 million outstanding GO bonds.
The Rating Outlook is Stable.
SECURITY
The bonds are secured by an unlimited ad valorem property tax.
KEY RATING DRIVERS
Large Tax Base: North Slope Borough's tax base benefits from the significant production of oil and gas; increasing geographic, producer, and product diversification; and ongoing public and private sector investment.
Concentrated Tax Base: The tax base is highly concentrated on naturally declining oil and gas reserves.
Strong Finances: 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.
Sound Debt Profile: The borough's debt amortizes rapidly, well within the lifespan of the borough's existing oil fields. Overall debt levels have been decreasing significantly and are currently moderate.
Good Financial Management Practices: Management uses long-term capital, debt and financial planning to position the borough to continue to provide robust public services even after oil and gas-related revenues begin to decline.
CREDIT PROFILE
The borough has a large, energy dominated economy. It is located on the north coast of Alaska, encompassing 94,877 square miles with 88,817 square miles of land and 5,946 square miles of water. The borough's modest population of 17,520 is comprised of year-round residents and seasonal workers from the oil and gas industry. About 30% of U.S. oil reserves and 18% of natural gas reserves are located in the borough, and estimates of total recoverable reserves have increased over the years with improvements in technology and the exploration of regions farther from the first fields developed at Prudhoe in the 1960s and 1970s. The energy sector provides a strong base for current economic activity, while 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 highly concentrated in a naturally declining resource, which is expected to result in assessed valuation (AV) declines over the long term. The tax base is assessed based on the value of capital investments in the borough as opposed to the natural resources. Consequently, AV has historically been much less volatile and more predictable than energy commodity prices. AV increased an average of 9.8% a year over the past five years, rising to around $17 billion for fiscal 2011. The tax base is very concentrated with BP plc (senior unsecured debentures rated 'A' with a Stable Outlook) and ConocoPhillips (Issuer Default Rating 'A' on Rating Watch Negative) accounting for 63% of the borough's assessed valuation. The top 10 taxpayers are all in the energy sector and together account for almost 95% of AV.
Solid revenue growth and prudent management practices have improved the borough's sound financial position in recent years. The unreserved general fund balance increased to a strong $85.6 million, or 25.6% of expenditures, in 2010 from 20% of expenditures in 2009. Financial reserves will be further bolstered by increased tax revenues due to the state's reassessment of the value of the Trans Alaska Pipeline System. Unreserved fund balance is expected to rise to a very strong $165 million, or about 47% of expenditures, by the end of the current fiscal year in June 30, 2012.
The borough's financial position is further strengthened by a permanent fund with about $450 million of assets as of June 30, 2011. The borough may withdraw as much as 8% a year from the permanent fund, but has recently made withdraws of 4%. The fund has grown significantly over the years, despite periods of market volatility. The borough has prudently decided that 25% of growth in general fund balance will be deposited in the permanent fund beginning in 2014.
The debt burden is judged to be moderate and is significantly below its peak in the 1980s. Direct debt will equal a moderate 2.8% of AV after the current issue. Debt is extraordinarily high on a per capita basis at $27,600 due to the sparsely populated nature of the borough. Debt amortizes rapidly with 83% paid off in five years and just under 100% paid in 10 years, well within the lifespan of the borough's existing oil and gas fields. The borough expects to issue approximately $60 million in debt annually through fiscal 2015, keeping the debt burden moderate. The borough has no unfunded pension or other post-employment benefit liabilities.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, the Underwriter, and Bond Counsel.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria', dated Aug. 15, 2011;
--'U.S. Local Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. Local Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648842
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