Crude Oil ( ) Brent Crude ( ) Natural Gas ( ) S&P 500 ( ) PHLX Oil ( )
 October 9, 2015 - 4:03 PM EDT
Print Email Article Font Down Font Up
Fitch Rates North Slope Borough, AK's $95.7 MM GOs 'AA'; Outlook Stable

Fitch Ratings has assigned an 'AA' rating to the following North Slope Borough, Alaska (the borough) bonds:

--$82.4 million general obligation (GO) general purpose bonds series 2015A;

--$13.3 million general obligation (GO) school bonds series 2015B.

The bonds are scheduled to sell via negotiation the week of Oct. 19, 2015. Proceeds will be used to fund the borough's ongoing capital improvement program and to pay cost of issuance.

In addition, Fitch affirms the following ratings:

--$300.5 million outstanding GO bonds at 'AA'.

The Rating Outlook is Stable.

SECURITY

The bonds are payable from an unlimited ad valorem property tax levy on all property within the borough.

KEY RATING DRIVERS

STRONG FINANCIAL POSITION: The borough's financial position is sound with solid general fund reserve and an extraordinarily large permanent fund.

SOLID BUDGET FLEXIBILITY: The borough's budget is structurally balanced, and the elected Assembly has ample tools to respond to potential financial risks, including the ability to raise its operating property tax levy and permanent fund transfers significantly. The expenditure framework is also reasonably flexible.

MAJOR ENERGY PRODUCER: North Slope Borough is home to the U.S.'s largest conventional oil field at Prudhoe Bay as well as smaller but significant oil and natural gas resources. The borough's oil and gas reserves are non-renewable and naturally declining resources, but new investments and improved technology has repeatedly pushed out the estimated lifespan of local oil fields.

OIL DOMINATED TAX BASE: The $21 billion tax assessed value (AV) is dominated by oil extraction enterprises and highly concentrated in the top 10 taxpayers. AV is insulated from short-term fluctuations in oil prices, but it is vulnerable to erosion during periods of sustained low oil prices.

MODERATE DEBT, RAPID AMORTIZATION: The borough's debt burden is moderate and declining as a percent of AV. Debt amortizes very rapidly, well within the lifespan of the borough's existing oil fields.

RATING SENSITIVITIES

The rating is sensitive to changes in the borough's financial, economic and debt profiles. The rating is unlikely to move higher due to economic concentration. The rating could come under downward pressure if low oil prices led to a sustained and significant decline in assessed values.

CREDIT PROFILE

The borough is located on the north coast of Alaska, encompassing a vast 94,877 square miles, an area slightly larger than the United Kingdom. The borough's modest population of 9,703 swells to 18,840 after including oil and gas industry workers.

ENERGY EXTRACTION DEPENDENT

The borough has a large, energy-dominated economy. The borough produced about 500,000 barrels of oil per day in 2014. Production has fallen from a peak of 2 million barrels per day in the 1980s but still makes up more than 5% of U.S. production. Estimates of total recoverable reserves have increased over the years with improvements in technology and the exploration of areas farther from the first fields developed at Prudhoe Bay in the 1960s and 1970s.

Continued exploration of oil fields across the borough, 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 90.8% of AV related to the top 10 tax payers, all energy companies. The top two taxpayers, BP PLC (Issuer Default Rating 'A' with a Positive Outlook) and ConocoPhillips (Issuer Default Rating 'A' with a Negative Outlook), account for 65% of AV.

AV is driven by the oil industry capital investments in the borough and much less volatile than energy prices. AV is based on the depreciated replacement cost value of the capital stock, not the economic value of oil infrastructure or mineral resources in the ground. AV fluctuates as investment rises and falls, but changes are driven by gradual depreciation and the degree to which depreciation is offset by new investment. Investment decisions are driven by long-term energy price expectations and only appear in AV data with a significant lag. AV increased 8.9% in 2015.

While economic concentration limits the rating, the continued growth of the tax base, driven by both reinvestment in existing assets and new fields, suggests that the borough's natural resources will support a significant level of economic activity for much longer than the rated bonds are outstanding. The North Slope produces a significant portion of the 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 $153.5 million or 33% of general fund expenditures and transfers out in fiscal 2014. The current rating is dependent on the maintenance of significantly above-average fund balances, as high reserves provide an offset to concerns about the concentrated tax base and time to respond to unexpected changes in tax revenues.

The borough's operating budgets appear structurally balanced, and borough policy makers have ample expenditure and revenue flexibility to respond to typical, cyclical financial pressures. A recently relaxed property tax cap (Senate Bill 138) significantly boosted the borough's revenue raising flexibility and budgeted fiscal 2016 revenues. The law allows the borough to use more of its tax levy for operations and less for debt service, which is declining. The borough's budgeted fiscal 2016 operating revenues are projected to rise $74 million, or about 40%, from 2015. The increase reflects a large increase in the operating levy that was fully offset by a reduction in the debt service levy, keeping the overall tax rate unchanged. The increase in revenues allowed the borough to cease annual withdraws from its permanent fund.

The borough's labor environment and an unusually high level of public services provided by the borough suggest that significant expenditure flexibility exists if the borough needed to reduce expenses; however, such reductions might prove politically difficult, given the high level of demand for services from the public.

The borough's financial position is further strengthened by a large and growing permanent fund with assets of $572.9 million as of June 30, 2014. The borough may withdraw as much as 8% of the fund annually for general governmental use. However, given the additional operational funding available under SB 138, the borough has ceased withdrawals and begun making annual contributions to the permanent fund. The borough has prudently decided that 25% of growth in unrestricted general fund balance will be deposited in the permanent fund, as well as the money earned by the borough's real property management fund.

MODERATE DEBT BURDEN

The overall debt burden will be moderate at 2% of AV after the current issue. Debt is extraordinarily high on a per capita basis at $40,832 due to the sparsely populated nature of the borough. Debt amortizes very rapidly with 100% paid in 10 years.

Pension and other post-employment benefit (OPEB) liabilities are less of a concern for the borough than many municipalities because the state of Alaska has largely assumed responsibility for underfunded public retirement plans. The borough pays a fixed percentage of payroll to the state for pension and OPEB, but these payments are a small part of its budget (0.8% of governmental funds spending in 2014).

The total carrying cost of pension, OPEB and debt service is high at 35% 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 the Trans Alaska Pipeline System (TAPS), which is routinely appealed by taxpayers. While recent court rulings have gone in the borough's favor, the borough estimates its current exposure at about $80 million to $100 million if it lost the outstanding cases in their 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. 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. In addition to its general fund resources, the borough would have the option of increasing permanent fund withdrawals for a period of time.

Additional information is available at 'www.fitchratings.com'.

Fitch recently published an exposure draft of state and local government tax-supported criteria (Exposure Draft: U.S. Tax-Supported Rating Criteria, dated Sept. 10, 2015). The draft includes a number of proposed revisions to existing criteria. If applied in the proposed form, Fitch estimates the revised criteria would result in changes to fewer than 10% of existing tax-supported ratings. Fitch expects that final criteria will be approved and published by Jan. 20, 2016. Once approved, the criteria will be applied immediately to any new issue and surveillance rating review. Fitch anticipates the criteria to be applied to all ratings that fall under the criteria within a 12-month period from the final approval date.

In addition to the sources of information identified in the applicable criteria specified below, this action was informed by information from CreditScope.

Applicable Criteria

Exposure Draft: U.S. Tax-Supported Rating Criteria (pub. 10 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869942

Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria (pub. 14 Aug 2012)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=992087

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=992087

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Fitch Ratings
Primary Analyst
Andrew Ward
Director
+1-415-732-5617
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94103
or
Secondary Analyst
Karen Ribble
Senior Director
+1-415-732-5611
or
Committee Chairperson
Doug Scott
Managing Director
+1-512-215-3725
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com


Source: Business Wire (October 9, 2015 - 4:03 PM EDT)

News by QuoteMedia
www.quotemedia.com