Fitch Rates North Slope Borough, Alaska's GO Bonds 'AA-'NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the following North Slope Borough's (Alaska) general obligation (GO) bonds:
--$85.9 million, series 2010A.
The bonds are expected to sell via negotiation on Oct. 18, 2010.
In addition, Fitch has affirmed the following rating:
--$379.3 million in outstanding GO bonds at 'AA-'.
The Rating Outlook is Stable.
--The borough's tax base benefits from the significant production of oil and gas, 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 state formula, the borough is currently benefiting from increases in its population and per capita average full property tax value.
KEY RATING DRIVER:
--Ongoing fiscal prudence to ensure the borough's future financial health when oil and gas production activity declines.
--Maintenance of a strong permanent fund as the borough's primary financial cushion.
The bonds are secured by the full faith, credit and taxing power of the borough.
North Slope Borough (NSB) 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, NSB's economy has strengthened, evidenced by a sizable 10.3% increase in assessed value from FY09-FY10, a low unemployment rate and 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 FY 10 AV.
NSB's economy depends almost entirely on the oil and gas industry. BP (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 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 construction of an Alaska gas pipeline which would originate in the North Slope. 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, NSB's projected unreserved general fund balance is expected to remain at approximately $73 million or a sound 26% of spending, comparable to fiscal 2009 results. Moreover, NSB'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, NSB's operating budget tax cap threshold has risen due to increases in its population and per capita AV, despite limitations imposed by the state formula. Fitch views positively management's demonstrated ability to maintain strong fund balance levels.
NSB'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 AV 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 $26,969 per capita due to the sparsely populated nature of the borough. This high debt level is largely mitigated by very rapid debt amortization, high AV (the debt is only 2.8% 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. 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 the Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, and LoanPerformance, Inc.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 16, 2010);
--'U.S. Local Government Tax-Supported Rating Criteria' (Dec. 21, 2009).
For information on Build America Bonds, visit 'www.fitchratings.com/BABs'.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria
Posted: October 6, 2010
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