Fitch Rates North Slope Borough, AK's GOs 'AA'; Outlook Stable
SAN FRANCISCO--(BUSINESS WIRE)--Fitch Ratings has assigned an 'AA' rating to the following North Slope Borough, Alaska (the borough) bonds:
--$100.2 million general obligation (GO) bonds series 2013A.
The bonds are scheduled to sell via negotiation on or about Oct. 15, 2013. The proceeds will fund the borough's ongoing capital improvement program and costs of issuance.
In addition, Fitch affirms the following rating:
--$354 million outstanding GO bonds at 'AA'.
The Rating Outlook is Stable.
The bonds are backed by an unlimited ad valorem tax levy.
KEY RATING DRIVERS
STRONG 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 37.1% of spending in fiscal 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 oil and natural gas resources. Ongoing investment continues to provide a significant taxable assessed value (AV), reaching $19.2 billion in 2013, up 49% since 2008.
CONCENTRATED TAX BASE: The tax base remains highly concentrated in the top 10 taxpayers represent 93.6% 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 and well beyond the life of the bonds.
MODERATE DEBT BURDEN: The borough's debt burden is moderate and declining as a percent of AV at 2.4%. Debt amortizes very rapidly, well within the lifespan of the borough's existing oil fields.
ENERGY EXTRACTION DEPENDENT
The borough has a large, energy-dominated economy. The borough is located on the north coast of Alaska, encompassing 94,877 square miles, an area just smaller than the states of Wyoming and Michigan. The borough's modest population of 18,082 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.
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 in 10 years.
CONCENTRATED TAX BASE
The tax base is highly concentrated with 98% of AV related to the oil and gas industry, which will eventually lead to substantial AV declines as resources are depleted. The top two taxpayers, BP PLC (Issuer Default Rating 'A' with a Stable Outlook) and ConocoPhillips (Issuer Default Rating 'A' with a Stable Outlook), account for 67% of AV. 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. However, 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 at a compound annual growth rate of 8.3% over the past five years.
While economic concentration limits the rating, the continued growth in the tax base and continued investment in the local energy infrastructure suggests 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 revenues and economic output of the state of Alaska (GOs rated 'AAA' with a Stable Outlook).
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 $154.9 million, or 37.1% of general fund expenditures and transfers out in fiscal 2012. Reserves have been bolstered by increased tax revenues due to the state's reassessment of the value of the Trans Alaska Pipeline System (TAPS). Reserves are projected to have increased in 2013 due to reimbursement of about $20 million of capital spending from bond proceeds.
The borough's operating budgets have come under moderate pressure due to expenditure growth that has outpaced growth of its operating property tax levy, forcing policymakers to reduce spending in fiscal 2013 and take budget action to limit growth in 2014. The borough's fiscal 2013 and 2014 budgets appear balanced. Solid revenue growth and a very strong reserve position suggest that policymakers will have time and reasonable options as they seek to keep ongoing expenditures in line with ongoing revenues; however, spending pressures are likely to continue.
Revenue options are limited by state law. Policymakers are lobbying for changes in state law that would allow the borough to use more of its taxing capacity for operations and less for debt, but the outcome of such efforts is uncertain. The current rating is dependent on the maintenance of significantly above-average fund balances.
The borough's financial position is strengthened by a permanent fund with about $506.9 million of assets as of June 30, 2013. 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, and made a $9.5 million transfer (the first major deposit in years) in fiscal 2013.
MODERATE DEBT BURDEN
The debt burden is moderate. Direct debt will equal a moderate 2.4% of AV after the current issue. Debt is extraordinarily high on a per capita basis at $24,637 due to the sparsely populated nature of the borough. Debt amortizes very rapidly with 90.4% paid off in five years and 100% paid in ten years.
The borough has no unfunded pension or other post-employment benefit (OPEB) liabilities, as such obligations have been assumed by the state. The borough pays a fixed percentage of payrolls to the state for pension and OPEB, but these payments are a small part of its budget (2.6% of governmental funds spending in 2012).
The total carrying cost of pension, OPEB and debt service is high at 30.1% of spending due to the borough's practice of paying its bonds down very rapidly. The elevated carrying cost is not a credit concern because it does not reflect an excessive debt burden, given moderate debt ratios and rapid amortization.
LARGE CONTINGENT LIABILITY
The borough reports a large contingent liability related to ongoing litigation over the taxable valuation of TAPS for tax years 2006 to 2011. The Alaska Supreme Court is expected to rule on the issue in early 2014. While lower court rulings have gone in its favor, the borough estimates its maximum exposure at $120 million if lost the case in its entirety. A second dispute with the state of Alaska centers on whether excess tax revenues collected after revaluations belong to the borough or the state.
The outcome of such disputes is hard to predict, but upcoming rulings could put downward pressure on the rating if the borough were forced to repay the entire contingent liability in one payment. The borough has the resources to repay the contingent liability, but the payment would draw the borough's $154.9 million unrestricted fund balance to a level ($34.9 million or 8.4% of spending) that would be inconsistent with the current rating if sustained. However, the borough would have the option of increasing permanent fund withdrawals for a period of time and could recover a more robust financial cushion over a period of a few years. Fitch will continue to monitor judicial rulings on TAPS and the borough's reaction to such rulings, but the borough appears to have the resources and flexibility to respond to even the worst case scenario.
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 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
Posted: October 7, 2013