Fitch Upgrades North Slope Borough, AK's GOs to 'AA'; Outlook Stable
SAN FRANCISCO--()--Fitch Ratings assigns an 'AA' rating to the following North Slope Borough, Alaska (the borough) bonds:
--$95.5 million general obligation (GO) bonds series 2012.
The bonds are scheduled to sell via negotiation on or about Oct. 18, 2012. The proceeds will fund the borough's ongoing capital improvement program and costs of issuance.
In addition, Fitch upgrades the following ratings:
--$483.7 million outstanding GO bonds to 'AA' from 'AA-'.
The Rating Outlook is Stable.
The bonds are backed by an unlimited ad valorem tax levy.
KEY RATING DRIVERS
FINANCIAL, TAX-BASE GAINS: The upgrade reflects continued strengthening of the borough's financial profile and continued growth of the underlying tax base.
IMPROVING FINANCIAL POSITION: The borough's financial position is sound, bolstered by a $456 million permanent fund and a large unrestricted general fund balance that equaled 31.6% of spending in 2011. Reserves are expected to rise by about $50 million in 2012.
MAJOR ENERGY PRODUCER: North Slope Borough is home to the U.S.'s largest oil field in Prudhoe Bay as well as smaller, but significant developed and undeveloped oil and natural gas reserves. Ongoing investment continues to provide a significant taxable assessed value (AV), reaching $17.8 billion in 2012, up 44% from 2007.
CONCENTRATED TAX BASE: The tax base remains highly concentrated and the top 10 taxpayers represent 94.2% of AV. The borough has seen increased activity by smaller oil companies over the years, but it has one of the most concentrated tax bases in the nation.
NATURALLY DECLINING ASSETS: The borough's oil and gas reserves are nonrenewable and naturally declining resources, but new investments, improved technology and high oil prices have repeatedly pushed out the estimated lifespan of borough oil fields. Significant activity is likely to continue for the foreseeable future.
MODERATE DEBT BURDEN: The borough's debt burden is moderate and declining as a percent of AV at 2.6%. Debt amortizes very rapidly, well within the lifespan of the borough's existing oil fields, and the debt burden is well below its peak in the 1980s.
The borough has a large, energy-dominated economy. The borough 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 18,082 contains 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.
Continued exploration of oil fields across the borough and in the Arctic Ocean, the participation of more second-tier oil and gas companies, and the prospect of huge gas reserves in the North Slope suggest that activity will continue at a significant level for the foreseeable future. The borough's harsh Arctic environment is likely to support only a very limited economy in the era after energy production, but the borough is actively building its permanent fund to prepare for that time, which is likely to come well after all currently outstanding debt matures.
Nevertheless, the tax base is highly concentrated in a naturally declining resource, which will result in AV declines over the long term. The tax base is assessed based on the value of capital investments in the borough. The economic value of these investments is closely linked to the value of energy exports, and investment rises and falls with energy commodity prices. But AV has historically been much less volatile and more predictable than energy commodity prices because it is based on the depreciated value of the capital stock. AV increased an average of 7.8% a year over the past five years. The tax base is very concentrated with BP PLC (Fitch Issuer Default Rating (IDR) 'A' with a Positive Outlook) and ConocoPhillips (IDR 'A' with a Stable Outlook) accounting for 72% of the borough's AV. The top 10 taxpayers are all in the energy sector and together accounted for 94.2% of 2011 AV.
While economic concentration limits the rating, the continued growth in the tax base and continued investment in the local energy infrastructure suggest that the borough's natural resources will support a very significant level of economic activity for much longer than the rated bonds are outstanding. The North Slope produces a significant portion of revenues and economic output of the state of Alaska (GOs rated 'AA+' with a Stable Outlook). The upgrade reflects the recognition that the borough is among the state's most important economic assets.
VERY STRONG FINANCIAL POSITION
Solid revenue growth and prudent management practices have allowed the borough to build very large operating reserves. Unrestricted general fund balance (the sum of committed, assigned and unassigned balances under GASB 54) was $117.8 million, or 31.6% of general fund expenditures in fiscal 2011. Unrestricted fund balance is expected to rise to more than 40% of expenditures when the borough publishes its fiscal 2012 audit. Reserves have been bolstered by increased tax revenues due to the state's reassessment of the value of the Trans Alaska Pipeline System. The borough's operating budgets came under some pressure in 2012-13 due to a reduced population estimate that reduces the legal operating levy under state law. Management reduced the rate of expenditure growth to maintain structural budget balance, rather than allowing the influx of one-time revenues to mask the developing structural imbalance.
The borough's financial position is further strengthened by a permanent fund with about $456 million of assets as of June 30, 2012. The borough may withdraw as much as 8% a year from the permanent fund, but has recently made withdrawals of 4%. The fund has grown significantly over the years, despite investment gains and losses. The borough has prudently decided that 25% of growth in general fund balance will be deposited in the permanent fund beginning in 2014.
MODERATE DEBT BURDEN
The debt burden is moderate and has fallen significantly below its peak in the 1980s. Direct debt will equal a moderate at 2.6% of AV after the current issue. Debt is extraordinarily high on a per capita basis at $26,018 due to the sparsely populated nature of the borough. Debt amortizes rapidly with 75% paid off in five years and 100% paid in 10 years, well within the lifespan of the borough's existing oil and gas fields. The borough expects to issue approximately $40 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 and IHS Global Insight.
Applicable Criteria and Related Research:
--'Tax-Supported Rating Criteria' (Aug. 14, 2012);
--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
U.S. Local Government Tax-Supported Rating Criteria