Fitch Rates $75.82MM North Slope Borough, Alaska GO 2004A 'A-'

Business Wire, Oct 11, 2004

SAN FRANCISCO -- Fitch Ratings assigns an 'A-' to $75.8 million of North Slope Borough, Alaska's, general obligation bonds, series 2004A, and affirms an 'A-' rating on the borough's $492.6 million outstanding general obligation bonds. The Rating Outlook is Stable. The bonds are scheduled to be sold by George K. Baum and Co. via negotiation on or about Oct. 19.

North Slope Borough's credit quality rests in the sizable oil and gas reserves remaining in the area and the resulting ongoing private-sector investment, as well as the strong balance in the borough's permanent fund. Debt amortization is rapid, which Fitch views as important given the borough's natural resource-dependent economic base. The aggressive debt retirement also partially mitigates the uncertainty presented by a new property tax valuation method, now in its second year of a three-year test period. The borough's economic future could be enhanced greatly by a natural gas pipeline and related developments.

The borough's main revenue source is its property tax, taxing equipment used for oil and gas extraction, and exploration, rather than the actual resource production. However, the borough is in its second year of a three-year test period for a new state-imposed methodology for determining equipment value. The new method bases the value on product production rather than actual cost of the devices less depreciation. While the borough believes this will ultimately provide higher values because the depreciation factor is lower than under the prior method, Fitch also notes the possibility for greater fluctuation in the tax base. The borough has determined that fiscal 2005's taxable value is $112 million higher than it would have been under the prior valuation method. Fitch's concern over tax base volatility is mitigated somewhat by the use of a three-year average for production and by the borough's remaining tax rate capacity and the ability to increase the permanent fund's support for general fund operations.

The borough's credit features are unique, since its economy depends almost entirely on the oil and gas industry, with little potential for diversification. British Petroleum Exploration and ConocoPhillips continue to dominate oil production in the borough, which together account for 87.3% of the borough's taxable value. Enhanced recovery methods have increased the oil fields' productivity and useful lives, with state and borough experts projecting steady oil production through 2009. However, the maturity of the Prudhoe Bay field brings the potential for declines in oil exploration and production, which could significantly affect the tax base regardless of the assessment methodology. The borough prudently projects declining values in future years. Oil exploration in the region still is considerable, and the existing corporations have shown a continued commitment to the region. Oil production in the borough represents approximately 13% of the total U.S. domestic output.

The borough's financial position remains sound, marked by satisfactory year-end fund balances and sizable reserves. The borough has run about break-even operations in the past two fiscal years, ending fiscal 2003 with $30.2 million in general fund balance, a healthy 11.3% of spending. Fiscal 2004 results should show about the same fund balance level. In recognition of the expected reduction in taxable value, the borough has begun consolidating services and reducing their employee levels.

North Slope Borough maintains a sizable permanent fund, with 8% of the value available for transfer to the general fund annually. Historically, the borough has only transferred 5.5%. Nonetheless, the market value has declined over the past several years, reaching $389.4 million at June 30, 2003, down from $446.7 million in fiscal 2002. The reduction has been caused by investment returns that were below the annual transfer to support general fund operations. However, very strong investment performance in fiscal 2004 is expected to lift the value to near its prior peak.

Extremely high construction costs in the area and the wide variety of services the borough provides result in a high debt burden. For these reasons, as well as the rapid debt retirement, debt service represents about one-half of operating expenses. Given the borough's aggressive repayment schedule, projected debt issuance is not expected to increase the debt burden.