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Fitch Rates North Slope Borough, Alaska GO Bonds 'A'; Outlook Stable

SAN FRANCISCO--(Business Wire)--Fitch Ratings assigns an 'A' rating to North Slope Borough's (Alaska) $40 million general obligation (GO) bonds, series 2009A and $45.3 million GO bonds, series 2009B (taxable Build America bonds). In addition, Fitch affirms the borough's $385.8 million in outstanding GO bonds at 'A'. The Rating Outlook is Stable.

The bonds are expected to sell via negotiation on Oct. 20, 2009. They are secured by the borough's full faith and credit and are payable from an unlimited ad valorem tax pledge collected specifically for debt service. While the series 2009B taxable Building America bonds are eligible for federal government subsidy payments, such payments are not pledged as security. Instead, the borough expects to levy ad valorem taxes in the full amount of debt service payments for fiscal 2010 and use the subsidy payments received during fiscal 2010 to offset debt service payments in fiscal 2011.

The 'A' rating reflects the borough's sound financial position, with additional reserves readily available, if needed, from the permanent fund, an increased share of mill rates paid by oil and gas companies, and a large unreserved general fund balance. Overall debt levels have been decreasing significantly since their peak in the 1980s. 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 AV. Additional credit factors include the sizable property tax revenues the borough receives from the industry producing oil and gas, both essential commodities. There is increasing geographic, producer, and product diversification, and both public and private sector investment is ongoing. Nevertheless, the tax base is subject to volatility and is highly concentrated on a naturally declining oil and gas reserve and concomitant assessed valuation declines in the long term. The borough's 10-year bond debt amortizes rapidly, well within the lifespan of the borough's existing oil and gas fields.

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. In fiscal 2009, assessed valuation increased by almost $2 billion or 15% to $14.9 billion. 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.

The borough's credit features are unique since its economy depends almost entirely on the oil and gas industry. British Petroleum (Issuer Default Rating 'AA+' 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 74% of the borough's assessed value. 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 may offset the eventual production decline resulting from the maturing of the Prudhoe Bay oil field. The borough also stands to benefit in the long-term from potential construction of an Alaska gas pipeline which would originate in the North Slope.

The borough's financial position remains solid, marked by high reserve levels. While the unreserved general fund balance declined to $67.6 million in fiscal 2008, down from $79.7 million in fiscal 2007, it remained a high 26% of spending. Similarly, although the borough's permanent fund was significantly hit by investment losses, it still ended fiscal 2008 at $462.1 million (down from $543 million in fiscal 2007), thereby continuing to provide the borough with a strong financial cushion. 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 2009, the borough transferred only 5% and has budgeted to transfer only 3.5% in fiscal 2010. The borough intends to keep the transfers as low as possible until the permanent fund balance is rebuilt.

Including the current issue, direct debt is a high $30,180 per capita. This high debt level is largely mitigated by rapid debt amortization, high AV (the debt is only 3.3% of total AV), 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 (the borough's historic average).

Additional information is available at www.fitchratings.com.

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