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Fitch Rates North Slope Borough (Alaska) $54.4MM 2007A GOs 'A-'; Outlook Stable

Posted on: Thursday, 4 October 2007, 15:00 CDT

Fitch assigns an 'A-' rating to $54.4 million North Slope Borough (Alaska) general obligation bonds, series 2007A. In addition, Fitch affirms the borough's $417.6 million in outstanding general obligation bonds at 'A-'. The Rating Outlook is Stable.

The bonds are expected to sell via negotiation by A.G. Edwards & Sons, Inc. during the week of Oct. 15, 2007. The bonds are secured by the borough's full faith and credit, and are payable from an unlimited ad valorem tax pledge.

The 'A-' rating reflects the sizable oil and gas production in the borough and related ongoing private sector investment, a sound financial position with substantial reserves maintained in the general and permanent funds, and rapid debt amortization. The rating also considers a highly concentrated tax base, a naturally declining oil and gas reserve, and operating deficits in the last four audited fiscal years. While the oil and gas sector is growing more diverse, with broader geographic exploration and development, a wider range of participating energy companies, and potential new products, it remains a highly concentrated and somewhat volatile tax base.

The borough's main revenue source remains property taxes, which are almost entirely derived from oil and gas production facilities. Historically, the borough taxed equipment used for oil and gas extraction and exploration at its actual cost less depreciation. After a four-year trial of a state-imposed production-based methodology for determining assessed valuation proved too volatile, the state has returned to the traditional methodology with some potential modifications. That decision, combined with increased oil field exploration and development and the state's change in the methodology for valuing the trans-Alaska Pipeline System, resulted in an assessed valuation increase of approximately $971 million in fiscal 2008. The borough also stands to benefit from the development of an Alaska gas line which would originate in the North Slope. Current plans are to begin gas pipeline construction in the summer of 2008.

The borough's credit features are unique since its economy depends almost entirely on the oil and gas industry. British Petroleum and ConocoPhillips (the latter with an Issuer Default Rating (IDR) of 'A-' and a Positive Rating Outlook by Fitch) continue to dominate oil production in the borough, together accounting for 85% 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 coal mining in the western North Slope may offset the eventual production decline resulting from the maturing of the Prudhoe Bay oil field.

The borough's financial position remains solid, marked by high reserve levels. The fiscal 2006 general fund balance grew to $58.5 million, almost 24% of total expenditures, transfers, and other uses. The increase in fund balance is attributable to transfers from the permanent fund and the receipt of $1 million in unbudgeted insurance proceeds. While the borough continues to restrain expenditure growth, it has experienced general fund operating deficits in the last four audited fiscal years. Strong investment returns have resulted in the permanent fund reaching $483 million. While the borough is permitted 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%.

Including the current issue, direct debt is a high $34,800 per capita, or 4.3% of assessed valuation. These debt levels are largely mitigated by rapid debt amortization and the fact that the majority of debt service costs are paid by oil and gas property tax revenues. The borough expects to issue additional debt annually through fiscal 2012.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public web site, 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.

Source: Business Wire

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